Startup founders seem to face innumerable questions when launching a business. Who do they want on their team? What will the name of their business be? How will they finance their venture? How much longer can they realistically survive on Instant Ramen before the business gets off the ground? Among the most critical decisions a founder can make is the entity type of the new business. Limited liability companies, corporations, partnerships—what does it all mean? Founders often find themselves debating between organizing their business as an LLC or an S-Corp. A common misunderstanding is that an S-Corp is an entity type one selects when forming a business. Rather, an LLC or a C-Corp must make an election under Subchapter S of Chapter 1 of the Internal Revenue Code to "convert" the entity to an S-Corp. While each business is unique, an LLC is still the favorite for smaller, lifestyle businesses because it is straightforward and relatively inexpensive to organize. An S-Corp, on the other hand, may be a better fit for faster-growing companies undaunted by an S-Corp's more stringent requirements. It is important to speak with an attorney to determine which approach is best-suited for your business.
These two organizational forms have similarities and differences--which can make choosing between them and others, like a C corporation (which includes publicly-held companies), confusing at best.