Call Jonathan C. Watts: 925-217-3255

In the last blog on S-corporations and Limited Liability Companies, we introduced S-corporations and reviewed the overall similarity in how S-corps and LLC’s are taxed. In this blog, we will discuss some of the crucial differences between theseS-Corp or LLC? business entities.

One of the most important distinctions between an S-corp and an LLC involves ownership. In general, an S-corporation may have only shareholders who are: (1) individuals who are U.S. citizens; (2) resident aliens; (3) certain types of trusts; and (4) other S-corporations.

Crucially, a corporation can lose its S-election if it acquires a shareholder who does not fall within one of these categories. For example, if a shareholder who is a US citizen sells or gives his or her shares to the limited liability company, the corporation will automatically lose its S election status. This can have very negative tax consequences, as it automatically subjects the corporation to the high tax rates that apply to C-corporations.

If your company will have any owners who are not within one of the categories described above, and you want to be taxed on a pass-through basis, you will need to choose an LLC. For example, if one of your investors is a foreign national, or wants to hold his interest through an LLC holding company, an S-corporation is out of the question.

However, there may also be situations where an S-corporation is out of the question. In California, an LLC is not available to most businesses that must have a professional license. For example, an attorney, physician, accountant, or engineer may not use an LLC. This leaves the S-corporation as the only alternative for California professionals seeking the protection of a corporate entity and pass-through taxation.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at or call him at 925-217-3255.

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