I am opening a business, and need to know whether to open a s corporation or llc

To answer your question accurately requires much more information than just the number of owners. A few relevant questions would include the following, what is the nature of the business, what is your income level, is it capital intensive, can you "zero out" the income, is the business service based, what do you anticipate in making from the business over the next few years, are you good with handing payroll tax paperwork? The best entity for this business will depend on the answer to these and other questions.

You may want to consult with an accountant or an attorney with entity formation experience.

I agree with all the points brought up by my colleague, and in general S corporations and LLCs are a great choice for and benefit sole owners. However, you should not be so quick to automatically exclude a C corporation. Most people eliminate the C corporation out of a fear of the "double taxation," but good planning can minimize the "double taxation" effect and even capture benefits that limited for owners of an S corporation or LLC.

Double taxation may not even be a concern in your situation, since it applies when there are after-tax earnings that need to be distributed to the owner. There are several ways to pull money out of the corporation (other than a direct distribution), and many of these are also tax deductible for the company. For example, the company can pay you:
- compensation for services performed for the company (as a salary or as consulting fees);
- principle and interest payments on a loan made to the company;
- lease payments for the land and/or facility you lease to the company; and
- royalty payments for the intellectual property you own and license to the company (e.g., tradename, trademarks, patents, trade secrets).

Also, if you plan to offer employee benefits (health insurance, life insurance, child care, retirement plans, etc.), you may be hurting yourself using an S corporation or LLC. These benefits are tax deductible to the company and tax free to the employee. However, the tax advantages of several of these benefits are limited or eliminated for an owner/employee of an S corporation/LLC.

Between an S corporation and a LLC, many of my colleagues are quick to recommend a LLC. LLCs have become popular because no formal meetings or other actions as necessary to maintain the entity (unlike corporations which generally require annual meeting of shareholders and directors). However, we recommend following the same corporate formalities (especially when there is a single member). This helps defend against an attack on the limited liability of the LLC from creditors, who are likely to claim there is no difference between the LLC and the owner since there was no separation between them and no corporate formalities were followed. Additionally, in Illinois (as is the case in many other states), the LLC is more expensive to form and the annual fees paid to the Secretary of State can be twice the fee for an S corporation.

Finally, while both a S corporation and a (single member) LLC offer the benefit of pass-through tax treatment they differ on how "separate" the tax returns are. The S corporation files a separate return of its own (IRS form 1120) and the shareholder reports income from the company on his/her Schedule E. In contrast, a single member LLC has no separate return, but reports the company income on schedule C of the member's tax return. Coincidently, the LLC and the single member are more likely to be audited than the S Corporation and a shareholder of a S corporation. While this should not be a deciding factor, it may be a consideration in your situation.

This post is intended for informational purposes only. It is not intended to provide legal advice and does not replace the services of a business lawyer and experienced income tax accountant, who can better understand how these issues fit into your particular circumstances.