Smaller business owners often face a dilemma of what organizational structure to choose to give their business a legal form. While a sole proprietorship is by far the most popular form for smaller businesses, it’s an unincorporated form viewing you as a part of your business and making you responsible for all company issues including financial risks and problems. For this reason, as soon as the risk potential rises, many entrepreneurs start thinking about converting their sole proprietorships into incorporated business forms that is LLC and S-CORP so they are asking “Can I Be An S-CORP And An LLC” because there is a difference.
Can I be an LLC and an S-Corp? The choice is not that big and normally falls between a limited liability company and an S-Corporation. Both of these business incorporation forms offer enough flexibility and taxation perks. And what if we tell you you can use the benefits of both entity types? Sounds promising? Then keep on reading to learn if you can be both an LLC and an S-Corp and what makes these entities differ.
Major Differences Between LLC Formation and an S-Corporation
Can I Be An S-CORP And An LLC? major Difference is An LLC company is a legal entity with a formal structure normally established by several co-owners and giving you independence from your business, hence the limited liability. The so-called limited liability protection will keep you exempt from the financial and legal liabilities of your business as well as shield your personal assets from being used as compensation for business-related losses, damages, and risks. In order to simplify all these procedures, entrepreneurs use the online services – more details about it can be found in the best registered agents review by llc.services.
When it comes to an S-Corporation, first of all, it’s not a business entity as it is but rather a tax classification of a corporation. Along with the limited liability protection similar to that of the LLC formations, the establishment of a corporation of this type also brings some advantages of a partnership.
The biggest plus of an LLC as compared to a corporation is that you can combine the legal structure of the LLC company with an S-Corp status. Yet, before we dig into this deeper, let’s make a quick overview of the differences between an S-Corp and an LLC formation.
- Ownership: Both an LLC and an S-Corp are pretty easy to form, especially if you engage one of the best LLC services for that, yet their ownership requirements are different. While LLC companies have no strict requirements on the number and citizenship of their owners, S-Corps should have no more than 100 members and aren’t allowed for non-US citizens. Besides, S-Corps have some limitations on membership for some legal entity types.
- Company Equity: Unlike LLC companies, corporations are shareholder companies with the right to issue stock.
- Company Management: While an LLC formation can be run either by the company owners or by a hired third-person manager, corporations have a multi-tiered management system by default consisting of the board of directors appointed by the company stockholders and executive managers handling daily operations.
- Business Incorporation Costs: Basically, LLCs are considered a bit quicker and easier to form while corporations entangle more routines and formalities to follow. In both cases, LLC formation services will be of great help. The fees for the establishment of a corporation and an S-Corporation are not that much different and vary by state. Get ready to pay from $100 to $250 for registering a corporation and from $50 up to $500 for registering an LLC. Where the major difference in costs lies is the obligatory maintenance reporting. Thus, S-Corp’s annual report fees are noticeably higher than those of LLC companies.
- Fund Raising: S-Corps with the stock issuing privilege can easily engage added funding and investments by simply selling their shares. LLCs don’t have that option and will most often get funding via credits or inviting new co-owners that will make contributions to the company’s equity, the latter option being not that simple.
LLC Formation vs S-Corporation: Taxation Peculiarities
Can I Be An S-CORP And An LLC because At a glance, LLC and S-Corp taxation schemes look very similar. Yet, this is what makes LLCs and corporations even more different and what makes an S-Corp status so attractive to many LLC companies.
To make it clear, by default, LLCs are regarded as pass-through entities that skip paying income taxes on the state and federal levels and transfer business incomes to the personal tax return of the company owners. Notably, for tax authorities, a single-member LLC looks like a sole proprietorship while a multi-member LLC is taxed under Chapter K of the Internal revenue Code. Besides, if LLC owners are employed in their own company, they should pay over 15% employment taxes on their annual profits.
When forming a corporation, initially, you form a C-Corporation that will make you exposed to double taxation by paying income taxes both on a company and on a personal level. To optimize your business taxes, you’ll have to register an S-Corp status for your company that will enable you to avoid dual taxation and pay all taxes on your own tax returns as well as skip employment taxes if you’ll be officially employed in your venture.
Combining LLC and S-Corp Benefits and How LLC Services Can Help
As we’ve mentioned above, LLCs can make use of an S-Corp taxation status without the need to actually convert their whole business structure. In other words, being registered as an LLC company, your business will be taxed as an S-Corp. Though you might doubt the necessity of such a move, it has a number of business benefits to offer.
- Legally operating as an LLC, you still enjoy a flexible and straightforward management system, with no tricky record keeping and corporate bureaucracy;
- From the tax point of view, you’ll be taxed as an S-Corp applying a pass-through scheme and benefiting from some corporate tax deductions;
- Your company will be able to pay salaries to you and other business co-owners not burdened with the employment tax while the remaining net income will be distributed between co-owners as passive dividends not charged with any added tax;
- S-corporation status gives an opportunity for more efficient business tax planning to keep up with your LLC company’s development and growth without the risk of tax overpayments.
To classify your LLC as an S-Corp for tax purposes, you need to file an application with the IRS. You can do it at the business incorporation stage or any time afterward to match changing business needs. Whenever you need it, it still engages some paperwork formalities and needs effort from your side. This is where LLC formation services will come to help. At a reasonable fee, they will handle all the job for you, be it business formation from scratch or filing for an LLC status. And such companies as LegalZoom or Rocket Lawyer have a whole number of other useful legal services for business on their lists.
Do I Need an S-Corp Status for My LLC?
Before getting that status for your LLC company, weigh all pros and cons of this and consult a tax expert on that matter to get professional advice related to your specific business situation. Overall, though, S-Corp tax status for an LLC is good when you have ambitious business growth plans or when your LLC has already achieved a higher level of profit.
Dmitriy Kondratiev, chief Editor of LLC.services, associate in Axon Partners.
Experienced lawyer (Intellectual Property, Patenting, Contract law, Labor Law, International Private Law).
Worked with IT-companies Webxloo (Delaware), Autoxloo (Florida), SCC (Delaware)