LLC S Corp: Everything You Need to Know
Forming an LLC S corp is a good choice for companies that want to reap the benefits of both types of organizational forms. 3 min read
Forming an LLC S corp is a good choice for companies that want to reap the benefits of both types of organizational forms. Before deciding if an LLC with an S corporation status is right for your business, find out everything you need to know about both LLCs and S corporations.
Comparing LLC vs. S Corporation
Limited liability companies and S corporations are two of the most popular kinds of organizational forms today. It's common for business owners, accountants, and lawyers to get caught up weighing the pros and cons of each option. However, it's not necessary to choose one over the other. Instead, you can set up your company as an LLC and then elect to have it treated as an S corporation.
If you're starting a new business or thinking of changing the status of an existing business, you'll want to compare LLC vs. S corporation features and benefits. Both organizational forms have many things in common. There are also many things that make each one unique. It's important to take a close look at each one before you decide the best fit for your company.
What Is an LLC?
For federal tax purposes, an LLC with one owner is treated the same as a sole proprietorship. As such, it is a disregarded entity, and the owner pays income tax on his or her personal tax return. An LLC with more than one owner is taxed as a partnership. In such a case, the owner is not considered an employee of the company for tax purposes.
The main benefits of an LLC include:
- Avoiding double taxation by passing income on to owners to pay on their personal income tax.
- Having more flexible operations with fewer filings and forms, lower start-up costs, and less-formal meeting and record-keeping requirements.
- Being able to distribute company earnings as the owners want and not based on the percentage of capital contributions.
- Passing the company's net earnings to owners as self-employment income that is taxed at 15.3 percent to cover their Social Security, Medicare, and Old Age Survivors and Disability Insurance (OASDI) costs.
Becoming a Corporation
There are several sections to the form. The first section helps you figure out if your business is eligible to change its status. In the next section, you need to state your current business type and select the type of entity you want your business to become.
The last section includes a consent statement. All owners need to sign their consent or appoint one member to sign on behalf of all the company's owners. If the company opts to have one owner sign the form, the business should have a record that all members agreed to allow this person to sign on their behalf. This record could include minutes from company meetings, for example.
What Is an S Corporation?
To become an S corporation, you must file Form 2553 with the Internal Revenue Service (IRS). Choosing S status allows you to avoid double taxation by passing corporate income, losses, deductions, and credits to shareholders for federal tax purposes.
In order to qualify for S status, your company is subject to certain limitations. If these limitations do not interfere with your business operations, an S corporation status may be a good fit for your LLC. To elect an S status, your company must meet the following requirements:
- It must be a U.S. corporation.
- It cannot have more than 100 shareholders.
- Shareholders cannot include partnerships, corporations, or nonresident aliens.
- It must have only one class of stock, which can include both voting and nonvoting stock.
- It cannot include certain types of financial institutions, insurance companies, and domestic international sales corporations.
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