I’ve been getting a number of questions regarding what’s best for a person’s business. The S-Corp or C-Corp? The LLC? A B-Corp, perhaps? When it all comes down to it, there’s really no perfect answer, and every case has to be looked at on an individualized basis. But one thing is for sure, there are bound to be questions as soon as a client learns about the possibility of electing S-Corp status for their LLC. For some reason, this idea of having an LLC that is treated like an S-Corp is some kind of revelation for our clients who feel like maybe, just maybe, this is a way to dodge the tax man or somehow outsmart the IRS.
While there are a number of important factors to consider, this is a quick blog post—not a one-on-one discussion with a business attorney, accountant, or tax attorney regarding your company. Accordingly, we’ve distilled the numerous factors down to just two of the most important.
- What is the Difference Between Electing S-Corp Status and Organizing as an S-Corp? The most important fact to keep in mind when considering an S-Corp election for your LLC is to remember that you are not reorganizing your LLC as an S-Corp—you are simply choosing a different tax treatment. The type of business entity you are organized as is a legal distinction while the type of entity you choose for taxation purposes is a tax distinction. So, if you have a single-member LLC without the S-Corp election, your business will be considered an LLC for legal purposes and a disregarded entity (or sole proprietorship) for tax purposes. Further, if you have a multi-member LLC without S-Corp election, your business will be considered an LLC for legal purposes and a partnership for tax purposes. Finally, no matter how many members your LLC has, if you elect S-Corp status, your business will be considered an LLC for legal purposes and an S-Corp for tax purposes.
- What are the Tax Benefits to Electing S-Corp Status? Well, the tax benefits depend on the number of members you currently have in your LLC. Most prominently, for all LLCs, being classified as an S-Corp for tax purposes can mean you no longer have to pay individual self-employment tax, which can turn out to be big savings. However, choosing S-Corp status also reduces your tax flexibility for a multi-member LLC because the partnership style tax status multi-member LLCs enjoy gives the members a lot more leeway. If tax benefits are the main focus of your reason to elect S-Corp status for your LLC, which they should be, you have to consider your individual needs and definitely talk to an accountant before making the election (but always have an attorney draft the necessary formation documents).
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