Some professionals advise forming an LLC while electing to be taxed as an S corporation. This
election takes away some of the benefits of being an LLC: (1) it
requires the LLC to follow S corporation rules (no "creative arrangements" or corporate members allowed, to name a few),
(2) the level of initial filings, tax returns and other tax complexity is significantly higher, and (3) the increased
potential for confusion and mistakes by members and professionals, due to state and federal laws that do not provide clear answers
on the treatment of this hybrid entity.
However, delaying the S election until the year after obtaining a business
acquisition/startup loan can provide the best of both worlds - allowing your personally guaranteed loan to be included in
basis (so you can deduct those large losses the first year), but taking advantage of the lower payroll tax for distributions in
subsequent years when you become profitable.
* This tax comparison of corporations and LLCs is intended to address a typical startup of a small business organization. This comparison is not exhaustive, nor does it apply necessarily in each and every circumstance. The contents of this website are not intended to be, nor shall they be considered, legal advice or legal opinions. Please see your CPA and/or attorney for more thorough coverage of the subject.
CAVEAT: Pursuant to applicable federal regulations, we are required to inform you that any advice contained in this communication is not intended to be used nor can it be used for purposes of (1) avoiding tax penalties or (2) promoting, marketing or recommending to another party any transaction or matter addressed above.