LLC vs S Corp
Which is better: the LLC or S-Corp?
The term “S-Corp” is the term used to describe an entity (LLC or Corporation) that has elected to be taxed under sub-chapter S of the IRS Code. Both corporations and LLCs can be taxed under sub-chapter S of the IRS tax code. In other words, you can have both an LLC and S-Corp.
When starting a new business venture, one of the first decisions you’ll face is whether to organize as an LLC or Corporation. There are other types of business entities to choose from too, but the LLC and the Corporation are by far the two most popular options, especially for smaller businesses and individual owners.
For more on this topic, we have an entire article on LLCs vs Corporations including the advantages and disadvantages of each.
What is an S-Corp LLC?
An S-Corp LLC is an LLC that has filed a tax election to be treated like an S-Corp for federal tax purposes. Just like a corporation, an eligible LLC can elect to be taxed under sub-chapter S of the IRS Code. One reason an LLC would elect the S-Corp tax classification is to reduce the self employment tax obligations of the LLC’s owners.
For more on this topic, you can read our article on LLC taxation.
Would your LLC qualify for S-Corp taxation?
S-Corp taxation is only available to certain small businesses. Generally speaking the LLC must meet all of the following requirements:
- Have fewer than 100 owners.
- Owners must be individuals (with a few exceptions).
- Only one class of ownership interests.
- Owners must be U.S. citizens or residents (no non-resident aliens).
- Profits and losses must be allocated in proportion to each owner’s interest (no disproportionate allocations).
- Each owner (and their spouse) must consent to S-Corp taxation.