Home > Uncategorized > If it’s always been done that way, ask why…

If it’s always been done that way, ask why…

January 11, 2013 Leave a comment Go to comments

I read an article earlier today about the characteristics of great entrepreneurs.  One of those characteristics really stuck out to me.  The article explained that great entrepreneurs ask why something should be done a certain way instead of just doing it the way it has always been done.

This has been a sore spot for me recently.  I have had several clients who have come to me regarding forming an entity for their small businesses.  Many of them had spoken to friends, accountants, insurance people, or even complete strangers about starting a business.  These people had been told that setting up an S-Corporation would be the best option for them.  Or worse, I have had clients come to me who have already set up an S-Corp based upon someone else’s recommendation, when an LLC would have been a better option.

When I ask the reason why this recommendation was made, the clients have simply responded that an S-Corp has long-been the best option for small businesses.  And I agree that, for a long period of time, forming a corporation and electing to be taxed as an S-Corporation was a great option for small businesses.

However, a few years ago, states allowed people to form Limited Liability Companies (LLC’s).  In many ways, S-Corp’s and LLC’s are very similar.  In other ways they are different, and that is why no one can say that one is better than the other in all circumstances.

In fact, I recommend that you do request the advice of your lawyer, accountant, insurance person, or friend when starting a business.  But when their advice is based on what has always been the best for entrepreneurs, and not on what is best for your situation, take that advice with a grain of salt.

In the same regard, if your lawyer tells you to form an LLC because of preferable tax treatment, or your accountant tells you to form an S-Corp for liability reasons, ask yourself whether you should heed your lawyer’s tax advice, your accountant’s legal advice, or whether everyone should be on the same page with issues like this.

Did you know that forming an S-Corporation can cost you significantly more money than forming an LLC?  S-Corporations are required by law to advertise their creation, as well as conduct annual shareholders and board of directors meetings.  These additional requirements obviously cost some money, and are not necessarily required if you are operating as an LLC.

Thus concludes my rant on S-Corps and LLC’s for the evening.  If you are thinking about starting a business, take the advice of the professionals you work with, and make an informed, educated, intelligent decision.  Don’t just do what has always been done.

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