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Why an S-Corp May Not Be Right for You

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Why an S-Corp May Not Be Right for You

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Sometimes creating an S-Corp might not be the best idea.

Sometimes, startup owners are so overcome with the first blush of their new business that they can be talked into becoming a business structure that they don’t understand.

You want to keep costs low, too, so what sounds right coming from the tax professional or attorney may not necessarily be right for you.

There are benefits to Small Business Corporations, but tiny businesses –especially home-based businesses and with a sole employee – don’t necessarily need the hassles and expenses of the S-Corp status. Extra tax forms need to be filed, so you might save several thousand dollars in a year by just starting up as an LLC, and growing your way into an S-Corp.

That may sound odd, because generally the biggest attraction of an S-Corp is the tax advantages. The profits and losses of the business pass through to the corporation owner's personal income tax. But you need money to grow your company, so if you will need venture capital, the regular LLC structure might be a better choice.

Venture capitalists won’t want to see the pass-through tax setup or a limit of 75 shareholders. Basically, the moral is: Find out what benefits the business structure will provide. If you don’t understand, get more than one explanation. You should have already done the Internet research, but ask around, too. 

“Never pay money for things you don’t understand,” says Rebecca Tervo, CPA.But if your business is at the right stage, and is ready to move ahead (to an S-Corp structure), then go for it.”

Related Topics S-Corp, New Business, Right Fit?
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