An LLC is a business structure that protects a business owner’s personal assets from business obligations or liabilities. LLCs can range in size from solo proprietors to businesses with hundreds of employees. For example, many law firms are LLCs, and solo contractors or freelancers may elect to form an LLC to shield personal assets from lawsuits or debt collection directed at the business. In general, C corps tend to be larger companies and S corps tend to be smaller businesses or sole proprietorships, but that’s not always the case. Indeed, there is plenty of gray territory when it comes to deciding the most strategic tax status for growing small- and mid-size companies, including LLCs (which we’ll discuss later). If your business later becomes more profitable and you find there are tax advantages to being a regular corporation, you can drop your S corp status after a certain amount of time.

Specific Advantages of an S-Corp

LLCs are a common business structure for small and medium businesses and entrepreneurs because of their simplicity and flexibility. They have more flexible management and profit-sharing options than corporations, yet they provide liability protection that’s not available to sole proprietorships or general partnerships. An LLC, or limited liability company, is a legal business structure that protects the owner’s personal assets from the company’s debts.

Stock classes and ownership limits

Generally speaking, a C Corp – named for its inclusion in subchapter “C” of the IRS code – is an independent legal entity, owned by its shareholders, that has unlimited growth potential. You can use our guides to start an LLC with the S corp status yourself, or you can hire a formation service to do it for you. If you’re an S-Corp owner, the IRS requires you to pay yourself a reasonable salary before taking any distributions. This rule exists to prevent business owners from avoiding self-employment taxes by labeling all income as untaxed distributions. It’s a way to tell the IRS you want your business profits taxed differently.

More IRS Scrutiny

• S corporations project enhanced credibility to customers, vendors, and financial institutions.
• With an S Corp, you’re allowed to divide your income into two parts, Salary and Owner’s Distribution–and you only pay self-employment taxes on the Salary portion.
• These entities are not subject to the accumulated earnings tax, which can be a concern for C corporations.
• Also, they should disclose how they handled tax affairs when they wanted to be considered an S Corporation but weren’t yet approved to do so.
• If you plan to grow your business and possibly transition to a C corporation in the future, an S corporation may be a better option.
• To do this, you will need to file Form 2553 with the IRS within 75 days of your corporation’s formation.

An LLC is a legal business structure while S corporation is a tax classification that’s available to some small businesses. Both LLCs and corporations can elect S-corp taxation by filing a form with the IRS. When starting a business, it’s important to evaluate your options from both a legal and a tax perspective.

A federal employer identification number, or EIN, is a business identification number issued by the IRS. Incorporation documents, typically called the Articles of Incorporation or Certificate of Incorporation, must be filed with the appropriate state agency and the necessary state filing fees paid. An S corporation is a corporation that has elected to be taxed for federal income purposes under Subchapter S of the Internal Revenue Code instead of Subchapter C. Many entrepreneurs wonder what types of business ownerships are possible and how to determine which one is right for their business. The following is a guide to the most common questions prospective business owners have about how to structure a business enterprise in the United States. If you’re still unsure whether an S corp is right for you or have more questions about how and when to file, you should talk to a small business lawyer.

To learn more about what this will cost, get a free tax consultation. Businesses taxed as S corps are subject to increased scrutiny by the IRS. A reasonable salary is any salary that you would pay someone to do the same job. Websites like Glassdoor or the US Bureau of Labor Statistics are a good place to ledger account start researching. Once you start or convert your S corp, you’ll have to carefully review your S corp financial statements, since they will be subject to closer IRS scrutiny. You’ll also have additional fees depending on the state where you established your business.

• Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements.
• We will also help you fulfill your tax obligations as an S-Corp and ensure that you comply with all IRS requirements.
• Itemized deductions on a personal return have a different set of rules.
• If the corporation makes an S declaration, it is no longer subject to the corporate level of taxation and becomes a “pass-thru entity’.
• New LLCs or C Corporations have two months and 15 days from their date of formation or incorporation to file for S Corporation tax treatment.

Business structure vs. business taxation

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• The main reason is they can use it to split their income into salary and distribution.
• Many entrepreneurs wonder what types of business ownerships are possible and how to determine which one is right for their business.
• Under the default LLC taxation, you’ll pay self-employment taxes on your full $100,000 of profit.
• Choosing the right structure is key – and for many entrepreneurs, the S corporation (S corp) offers an ideal balance of tax advantages and legal protection.
• Whether it’s another article, a book, a form, or a connection to an attorney, we’ve got solutions for all situations.
• Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

When is it better to create an LLC instead of a C corp or an S corp?

If you qualify, you can form an LLC or a corporation and elect to be taxed as an S-Corp instead. Next, prepare and file Articles of Incorporation with your state’s Secretary of State office. This document establishes your business as a legal entity and must include information such as the corporation’s name, purpose, registered agent, and number of authorized shares. After filing, create comprehensive corporate bylaws that outline operational procedures, management structure, and shareholder rights. When an LLC is taxed as a sole proprietorship or partnership, the owners are considered self-employed.