Forming an LLC: The best choice for small businesses

Business Owners have been calling me for more than 25 years to ask what I recommend as the best entity – corporation or LLC – to use for their business.

Here’s my number #1 choice for most small businesses. I now regularly recommend they form an LLC that makes the S corporation tax election. But that wasn’t always the case. Read on and I’ll explain why.

In the past, I’ve been partial to S corporations and have operated my own law practice for many years as an S corporation. S corporations provide good liability protection and may provide significant tax savings with respect to the 15.3% FICA or Self Employment Tax if set up properly.

S corporations provide the same liability protection as regular corporations which have a long legal history in the courts with respect to liability and tax issues. This provides good predictability of the outcome when you go to court or fight with the IRS.

I still believe S corporations are a good entity choice for small businesses. So why do I now routinely recommend they form an LLC that makes the S corporation election?

Let me explain. LLC’s provide the same or similar liability protection as do corporations. LLC’s have now been around long enough that they are starting to have more predictability with legal and tax issues. If you form an LLC that makes the S corporation election, you can also save on the FICA taxes just like an S corporation. LLC’s tend to be more flexible and easier to operate than corporations. Depending on state law, it may be harder for creditors to get to the ownership interest of an LLC than it is to get to stock ownership in a corporation.

Having said all of that, you don’t go wrong with either an S corporation or an LLC, but my choice is to form an LLC.

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