It is recommended to consult an experienced business lawyer for formation of an LLC. LLC is an abbreviation for Limited Liability Company. Instead of shareholder owners as in a corporation, LLC owners are referred to as members. LLC’s may offer liability protection to members similar to corporate liability protection to shareholders in many situations. It should be noted however, that Pennsylvania courts may likely treat a single owner LLC as a sole proprietorship without liability protection. For multi-member LLC’s, initial percentage of ownership is typically determined by the percentage of each member’s initial capital contribution. An LLC can be member managed, or an LLC can be manager managed through the hiring of a manager. Instead of bylaws like a corporation, an LLC should have an operating agreement. An LLC has a great deal of flexibility, so an attorney experienced with LLC formation can help address critical issues. An LLC operating agreement should address how the LLC is managed and indemnification of members. Furthermore, the operating agreement may address how future monetary contributions are handled, and whether they are considered a loan to the LLC by a member, or an additional capital contribution for an increased percentage of ownership. An operating agreement may also address how future members may be added, criteria for expulsion of a member, and what happens if a member dies, becomes disabled, or is involved in a divorce. It is also recommended that married members forming or joining an LLC have their spouses sign a spousal consent to operating agreement. An inexpensive online ‘fill in the blanks’ operating agreement may not adequately address some of these and other critical issues. Ongoing records may be less formal for an LLC vs. a corporation, but records and meeting minutes should still be kept for an LLC. This may also help establish a separate entity for liability protection.

It is also recommended to consult an experienced business lawyer for formation of an S corporation. An S corporation is often referred to as a personal corporation, and derives the name S corporation from Subchapter S of the Internal Revenue Code (IRC). Unlike C corporations, S corporations are only taxed once for federal income tax purposes, with ‘flow-through taxation’ or ‘pass-through taxation’ to the shareholders. S corporations are limited to not more than 100 shareholders. S corporations and C corporations may both be closely held corporations. However, S corporations can only be privately held corporations, and cannot be publicly held corporations such as publicly traded C corporations on Wall Street. Instead of an operating agreement as in an LLC, an S corporation should have bylaws. An attorney experienced in setting up corporations can help setup the bylaws. Bylaws may define things such as shareholder meetings, voting criteria, voting quorums, interested shareholders, responsibilities and authorities of the board of directors, how officers are elected, officer responsibilities and authorities, committees, indemnification, corporate records, and the corporate fiscal year. An experienced business lawyer can also help with the corporation organizational meeting and minutes for the meeting. The organization meeting may include such things as adoption of the corporate seal, electing officers, documenting shareholders, a resolution for opening a bank account, and adoption of the corporate bylaws. Inexpensive online ‘fill in the blanks’ bylaws and corporate forms may not adequately address some of these and other critical issues. An experienced business attorney may also help establish a basis for ongoing required corporate record keeping, such as minutes of annual meetings of the shareholders etc.

It is also recommended that an experienced certified public accountant (CPA) be consulted before and during the formation of an LLC or S corporation. A CPA should review the pros and cons of financial and taxation issues related to LLC’s and S corporations (and also C corporations). For a single member LLC, a CPA should review the pros and cons of a single member LLC being taxed as a sole proprietorship vs. a corporation. For a multi-member LLC, a CPA should review the pros and cons of a multi-member LLC being taxed as a partnership vs. a corporation.

Which is better, an LLC or an S Corporation?

The short answer is that it depends upon your situation. It is recommended that before forming either an LLC or an S Corporation, that BOTH an experienced business attorney and a certified public accountant be consulted. There may be a strong advantages of one vs. the other from legal, financial, and taxation perspectives.

Attorney Kirk E. Mentch, Esquire