Why Are S Corps Gaining Popularity?
Why S-Corps May Be More Attractive to Investors
Disclaimer: This content has been made available for informational and educational purposes only and is not meant to be a substitute for legal, accounting, or other professional advice. If you have specific questions about any legal matter, you should consult with an attorney or other professional services provider.
In business dealings over the past decade or so, I have observed an increasing number of business owners opt for an S Corporation (S Corp) as their business entity over other entity types like the Limited Liability Company (LLC).
This may be for good reason.
Though S Corps may cost more to initially set up, they can offer certain advantages over an LLC for business owners looking to work with investors. Here are some potential advantages of structuring your business as an S Corp:
Attracting Investors: S Corps may be more attractive to certain investors, such as venture capitalists or angel investors, as they are a more familiar and established business structure. Investors may perceive S Corps as having a higher level of credibility and transparency compared to LLCs, which can make it easier to secure investment funding.
Ease of Raising Capital: S Corps have the ability to issue different classes of stock, such as common and preferred shares, which can facilitate capital raising. This flexibility allows you to structure equity ownership in a way that aligns with the preferences and needs of potential investors. Additionally, S Corps can have an unlimited number of shareholders, which can accommodate a larger investor base.
Investor Protection: Corps offer investors certain protections and rights. Shareholders of S Corps typically have limited liability for the company's debts and obligations, similar to the limited liability protection provided by LLCs. This can be an appealing feature for investors, as it helps safeguard their personal assets from the company's liabilities.
Pass-Through Taxation: Like LLCs, S Corps have pass-through taxation, meaning the company's profits and losses pass through to the shareholders' individual tax returns. This can be advantageous for investors because they can potentially offset their share of the company's losses against other income on their personal tax returns, reducing their overall tax liability.
Potential Tax Savings: S Corps may offer certain tax-saving opportunities that are not available in LLCs. For example, S Corp shareholders who are actively involved in the business can potentially receive distributions that are not subject to self-employment taxes. Instead, they may only pay Social Security and Medicare taxes on their reasonable salary, potentially resulting in tax savings compared to the self-employment tax obligations of LLC members.
Exit Strategy Options: S Corps provide more flexibility when it comes to exit strategies, such as selling the business or going public. The ability to issue stock and the familiarity of S Corps in the market can make it easier to attract buyers or engage in mergers and acquisitions.
It's important to note that the advantages of investing in an S Corp over an LLC may vary depending on specific circumstances, investor preferences, and the applicable laws and regulations in your jurisdiction. It's always recommended to consult with legal, tax, and financial professionals who can provide guidance tailored to your individual situation.
On A More Personal Note
I’m often asked if I’m happy as an entrepreneur… The often long hours. Not partying or hanging out with my peers regularly.
I know why the question is being asked. And I know the underlying concerns of those who ask this question.
Here’s the truth. I haven’t always been happy along the journey. And I know from innumerable conversations with other entrepreneurs, that the same can be said for many of us in general.
However, what I’ve learned and was reminded of recently is I’m happiest when I’m working within my power, and I’m serving, and working with people who value my efforts.
You have to find fertile ground that inspires, grows, and edifies you.
You have to find or curate spaces where people appreciate and value you. Spaces where you can express your gifts unabashedly and know that your impact is regarded.
Don’t ever feel ashamed or allow others to shame and cajole you into operating in spaces with people who don’t feed, motivate, and protect your gifts.
When I remember these things, and begin to move towards fertile ground, I find happiness in my work and those whom I count as comrades.
I’m grateful.
The world around us wasn’t built by the exceptional. It was built by everyday people who were willing to do exceptional things. Go build something.
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