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Yes, People still start new S corporations. Why?

October 08, 2009

Business attorney Rush Nigut poses a provocative question:

Does Anyone Form an S Corporation Anymore?

The title of this post may be a little tongue-in-cheek, but I would say at this point I am forming perhaps 2-3 times as many LLCs as S corporations.

It still doesn't mean you should rule out the S corporation as your entity of choice. It could be the entity for your situation. Joe Kristan, an accountant with Roth and Company in Des Moines, explains in a recent post who can and should own a S corporation.

It's not surprising that you see more LLCs formed than S corporations, because LLCs can be used to form almost every kind of tax business entity - even S corporations, oddly enough.

Yet S corporations endure. Why?

- They are easier for many investors to understand. All income and expense items go to owners straight-up in percentage to their stock ownership. In contrast, mult-owner LLCs are normally taxed as partnerships, which can require complex special allocations of income and deductions even in seemingly simple situations.

- Iowa has a special tax credit for S corporations that is unavailable to other pass-through entities. This "Form 134 credit" can greatly reduce Iowa taxes for businesses with significant out-of-state sales.

- Self-employment/payroll tax savings. S corporation K-1 income is not subject to self-employment or payroll taxes. LLC K-1 income of a member active in the business normally is all subject to self-employment tax. (But be careful - the IRS frowns on S corporation employees who don't take at least a "reasonable" salary.)

- W-2 vs. K-1. An S corporation owner/employee gets a W-2 and has income tax withheld like other employees. An LLC member who works in the business isn't supposed to get a W-2; instead, the "salary" should be reported as a "guaranteed payment" on the K-1; the taxes are supposed to be paid in quarterly estimates, rather than by withholding. Some taxpayers just don't like this.

LLCs are great tools, and they can do many things S corporations can't do. Yet S corporations are still an important item in the tax toolbox.