The S Corporation has become one of the most popular business structures in America because of its tax advantages and other benefits – but what if you are trying decide how to incorporate a business and you’re not sure if an S Corporation is the right choice for you?

If you’re trying to choose a business structure, there are several reasons why an S Corporation might not be the right choice.

  • You’re a sole proprietor who doesn’t want the hassle: If you’re a solo entrepreneur or sole proprietor with a “payroll of one,” it might not make sense for you to set up the extra structure and formalities and compliance obligations that go with an S Corporation. If you incorporate as an S Corporation, you need to set up a board of directors, file annual reports and other business filings, hold shareholder’s meetings, keep records of your meeting minutes, and generally operate at a higher level of regulatory compliance than your business might need or want to deal with. You also will need to “do payroll,” to pay your employees, even if you’re the only employee. This can create extra costs and operational challenges. Instead of dealing with all this red tape and complexity, forming an LLC might give you greater simplicity and ease of doing business. With an LLC, as a sole proprietor, you don’t have to create a board of directors or jump through as many regulatory hoops.
  • You want venture capital: S Corporations offer important tax advantages for small business owners – but there’s another side to that coin; the IRS only allows S Corporations to issue one class of stock. With an S Corporation, there are no “preferred shares” or specialized tiers of stock with special privileges or benefits for the shareholders. If your company wants to attract venture capital or “angel investor” financing, you might be better off as an LLC or C-Corporation, since venture capital investors often want “preferred shares” of stock in your company (as a condition of giving you their money).
  • You want to grow and go public: S Corporations are designed for smaller businesses and so there are limitations on ownership of an S Corporation. An S Corporation can have a maximum of 100 shareholders (married couples and families count as a single shareholder for this purpose). In contrast, big publicly traded companies that incorporate as C Corporations can have millions of shareholders. So if you have big growth plans for your business, incorporating as an S Corporation is probably not the best choice for your long-term future.

NOTE: CorpNet does not give tax advice and this article does not claim to do so. Please consult with a professional tax adviser before making any final decisions about whether to incorporate as an S Corporation (or other corporate entity) and how to handle your corporate and personal income tax responsibilities.