In an earlier post I had mentioned my main reason for becoming an S-Corp. If you did not read that article please click here .  As a refresher, there is a tax advantage to becoming an S-Corp versus a sole proprietor or a C-Corp (however, there are some good advantages to becoming a C-Corp as well).

Unlike an LLC or C-Corporation the S-Corp can only have one type of stock.  Let’s say you decide to acquire a shareholder, however, you are the one that has taken on the liability of many of the bills and purchasing of assets. In a case like this you would need to be careful with an S-Corp, especially if you are trying to create a complex relationship with the other shareholder(s).

Let’s say we have an LLC and we have 3 members. In an LLC we use the word “members” instead of shareholders and I will show you why.  Johnny has $250,000 dollars to invest in his Sausage and Peppers food truck. (You can tell I’m Italian right :)). Johnny however, wants to motivate some hot dog guys from town so he calls Doug and Phil.  Now, Doug and Phil know a thing or two about relish and sauerkraut…… heck,  they were both born in Poland and have outstanding recipes.

Johnny brings these two valuable people into to the business. To give an incentive, Johnny tells them they can become members of the LLC.  Johnny…. in a roundabout way can create any type of arrangement he wants with his business partners by handing over a share of his business. However, if Johnny were to make them shareholders in his S-Corporation, there isn’t a  good and easy way to make them not part owners of the company.

If you want to bring on a business partner in an S-Corporation,  your choice of an individual should be rock solid. You also should have a clear understanding that they are a shareholder(owner) of the company and are entitled to a percentage as owner of the company.  It’s not easy to go into business with anybody.  It’s your business marriage.  Therefore, be even more mindful when doing so under a corporation especially and S-Corp.