Business Formation

S Corporation Pros and Cons: Learning the Basics of an S Corp

“Should we form an S corporation (frequently referred to as an “S Corp”) or a limited liability company (“LLC”)?” I am asked at least once a week – and to be perfectly honest… it is a fantastic question that I wish I were asked more often. When entrepreneurs look to form a small business, the decisions of these future business owners can have long lasting effects. One of these decisions is the decision of how to best structure a new business.

An S corporation is a corporation that has received a special designation from the IRS. When making the consideration to start a new business, the S Corp is one of the most common types of business entities. While an S Corporation is a fantastic choice for many new businesses, understanding the pros and cons of forming an S Corp will help you determine if it is the right entity for you.

Forming a Business in New York vs Delaware - Why forming a Delaware LLC is a Mistake

Forming a business in Delaware used to always be the way to go. However, times have changed. Many people wonder whether forming a business in Delaware is more advantageous than forming a business in New York. In this article, the examination will be done with regards to Forming a Business in New York vs Delaware and why Delaware might not be the place to go. 

Usually, when a new client is looking to start a business, he or she will call me and tell me something along the lines of: "I would like to start an LLC in Delaware. Can you help me with that?"  And while I could easily agree and be on my way with my fees in hand - doing so would make me a bad business lawyer.

Is the Customer Really Always Right? 

A good business lawyer is not merely going to do everything his or her client wants (sorry clients)... at least not right away. While forming an LLC in Delaware might be the right option, it might very also well be the wrong, sometimes disastrous, option. A good business lawyer will ask questions, evaluate the situation, and offer advice as to what the best course of action should be.

But let me get off my soap box and get back to my original scenario. After getting this request to form a Delaware LLC, I usually ask two questions. The first is "Why do you want to form an LLC?" and the second is "Why do you want to do it in Delaware?". We will get into the LLC issues on a later blog post, but with regards to the Delaware question, I will usually get a response along the lines of "I don't know" or a variation of it.

Delaware Isn't What it Used to Be - The New General Rule for Where to Form a Business

The truth is, forming a business in Delaware used to be the way to go. However, a lot has changed. Now, hopeful business owners have many options to choose from and aren't as restricted as they used to be. 

As a general rule, I recommend that all new businesses or startups form a business in the state where they are operating. While forming in Delaware might be a good option, there are a lot of factors that need to be taken into account before being able to come up with that conclusion. For example, if your business is located in New York and you registered it as a Delaware LLC, your business does not have the authority to do business in New York. You would need to register that Delaware LLC as a foreign LLC in New York in order to be permitted to do business in New York. Essentially, the business would be paying double the registration costs when they didn't need to do so. And even worse, if they don't register as a NY foreign LLC, years down the line, the business will be responsible for years of back taxes and penalties it should have been paying as a NY foreign LLC. 

Advice Going Forward

This is not to say that there are no advantages to starting a business in Delaware. There are many reasons why starting a business in Delaware still makes sense, especially if you are not starting a run of the mill small business- however these reasons are rare and I only primarily see them in large scale businesses, not small businesses. The only way to know for sure whether it would be a good idea to form a business in Delaware would be to hire an attorney to help you make that decision. While hiring an attorney is by no means, a cheap undertaking, hiring a experienced business attorney to help you make the best decision for your future business is a invaluable investment. Consider hiring one to help you make this decision, among many others, in your next business undertaking.  

Julian Cordero is an Attorney, Business Strategist, and Music Producer. Oh and he blogs too!  Julian is licensed to practice law in New York and is the Managing Attorney of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property Law.