LLC or S-Corp? What's the difference?

 


Often times, I hear small business owners ask, "should I create an LLC or an S-Corp?" Well, first, it's important you understand the difference between a legal business entity and an IRS tax election. An LLC and an S-corporation involve two separate matters. A business entity, also referred to as a business structure, is an organization that is formed to conduct business. Typically, your business entity is formed on the state level by filing with your Secretary of State. The entity or structure you select affects issues such as formation requirements, exposure to personal liability, governance and management, etc. With this in mind, selecting your business entity is one of the most important decisions you will make as a business owner. One of the most popular business structures is an LLC, but there are several other legal business entities to choose from. Others commonly include, sole-proprietorships; partnerships; and corporations.


On the other hand, an S-corporation is a tax election which affects how your business will be taxed by the IRS. By default, the IRS applies pass-through taxation to LLCs which means LLC members avoid the double taxation that applies to C-corporations. In the event an LLC elects to be taxed as an S-corp, it's usually for the purpose of saving on self-employment taxes. For some LLCs and their members, electing to be taxed as an S-corporation can be beneficial and potentially reduce tax liability. Of course, you should work with a tax professional to consider all of the pros and cons and to determine if you business qualifies for S-corporation status.


So in response to the initial question, "should I create an LLC or and S-corp?", business owners must first decide if they will structure their business as an LLC before they elect for s-corp tax treatment. If you plan to start a business or already have an existing business, make sure you talk to your professional advisors such as an attorney and CPA before choosing your business structure and tax status.


 

This information is for educational purposes only. The information presented does not constitute legal advice, nor does it create an Attorney-Client Relationship.

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