Is the LLC or S-Corp Better For You?
Key differences you should know between the LLC and S-Corp
“S-corporation” is what we typically call a business (LLC or Corporation) that that has filed Form 2553 (aka the “S Election”). The filing of the S Election informs the IRS that the business desires to be taxed under Subchapter S of the Internal Revenue Code. The advantage of S-Corp taxation is a minimization of the Self Employment Tax burdens.
An LLC can be taxed as an S-Corp
A multi-member LLC is taxed like a partnership. This means the LLC files a partnership tax return and the partners report/pay taxes individually.
A single-member LLC is taxed like a sole proprietorship. This means the owner of the LLC reports income on his/her personal tax return (Schedule C of the Form 1040).
An LLC taxed as an S-Corp files an S-Corp return annually (Form 1120S). An LLC taxed as an S-Corp has certain tax advantages. The key tax advantage (as of the writing of this webpage) is the ability to reduce your self-employment tax burden.
To take advantage of the tax savings attributable to the s-corporation status, the entity will have to pay its owner(s) a salary. Because running payroll creates many additional administrative tasks, the S Election may not make sense for an entity that would otherwise not have employees.
S-Corp Restrictions and Limitations
To qualify for s-corporation status, the entity must meet the following requirements:
- Be a US corporation or LLC;
- Be owned by only US residents (NOT a partnership, corporation or non-resident alien);
- Have no more than 100 owners;
- Have one class of stock (no preferred stock); and
- Not be an ineligible business (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
In order to become an s-corporation, the entity must submit Form 2553 Election signed by all the owners within 75 days of forming the business.