At first glance, an LLC and an S Corporation may seem very similar. After all, both provide owners limited liability protection. An S-Corp is a type of corporation that qualifies under subchapter S (hence the name) of the tax code, allowing it to be taxed as a partnership instead of a corporation, which is subject to double taxation. LLCs may also elect a similar tax status, except they may do so while avoiding the complex regulations and restrictions that a corporation is subject to.
If you're trying to decide if you should form an LLC or an S-corp, here's a look at how these two business entities differ.
Taxation Issues
One of the biggest downsides to incorporating a business is tax status. Corporations are subject to double taxation, as corporate income is taxed first and then shareholders are liable for income taxes on any dividends they receive. An S Corporation allows certain corporations to be taxed as a partnership instead to avoid the double taxation, provided the corporation can maintain subchapter S requirements. Because an LLC is not recognized as a tax entity by the federal government, it must elect its own business entity classification. LLCs can file as a partnership or a sole proprietorship.
If you're trying to decide if you should form an LLC or an S-corp, here's a look at how these two business entities differ.
Taxation Issues
One of the biggest downsides to incorporating a business is tax status. Corporations are subject to double taxation, as corporate income is taxed first and then shareholders are liable for income taxes on any dividends they receive. An S Corporation allows certain corporations to be taxed as a partnership instead to avoid the double taxation, provided the corporation can maintain subchapter S requirements. Because an LLC is not recognized as a tax entity by the federal government, it must elect its own business entity classification. LLCs can file as a partnership or a sole proprietorship.