The Breakdown
It’s dangerously close to tax time! This means there is a ton of buzz around the ever present discussion of whether a company should elect to be an S-Corporation (S-Corp) or continue to be taxed as a Limited Liability Company (LLC). While you should always consult a tax professional before making these decisions, we have outlined the basics that you need to know when considering the decision.
First, you must understand that an S-Corp is not a business entity structure. It is simply a tax election that is made with the IRS to determine how your business entity will be taxed.
As explained in a previous blog, LLCs are “pass-through entities” meaning any income will be paid by the individual members and taxed at the self-employment rate. The LLC will not be taxed at the company and individual level making the processes generally straightforward.
S-Corp Election
The two main differences between a LLC and an S-Corp are how the entities are taxes and the structure of the business. Both are outlined below:
Business entities regarded as S-Corps by the IRS will pay their shareholders a reasonable salary rather than the business income passing through it to members. The S-Corp will then pay payroll taxes (which can be deducted from the company’s income). Any leftover income minus losses, deductions and credits will be passed through to shareholders (commonly known as dividends). When the profits passed to shareholders as dividends, they are taxed at a lower rate than the self-employed tax rate.
Business Structure
In addition to the differing tax consequences, S-Corps must have less than 100 shareholders and they all must be U.S. citizens. This is in contrast to the LLC requirements which allow for unlimited members both domestic and abroad.
Lastly, S-Corps are permitted to issue stocks (only one class) while an LLC may not.
Should you remain an LLC or elect to be an S-Corp?
The answer lies in what is most important to you as a company utilizing the advice given by your chosen tax professional. However, it is beneficial to have an experienced business attorney assist with the establishment of your business entity to ensure you are filing properly with the state.
Our Attorneys are here to make the business formation process easier for you. At Nowlin Scott Law Firm, we use a flat fee schedule for all of your business needs. Let our Attorneys handle every step for you.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.
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