What is an S Corp?
An S Corporation (S Corp) is a filing election with the IRS. They run similarly to an LLC (a pass-through entity) but with the added benefits of a corporation.
You’ve likely heard the term pass-through entity; it simply means your business is not responsible for corporate taxes because the profits and losses pass to the owner(s), who becomes responsible for the taxes owed.
If you are considering the structure of your business, you might consider the S Corporation. An S Corp typically offers self-employed a better deal than LLCs, partnerships, or sole proprietorships.
At a Glance
S Corps offer significant tax benefits and lessen your self-employment taxes owed at the end of the year. You’ll have better access to benefits, protection against your assets, and credibility in your industry. But all those fantastic benefits come at a cost. The incorporation and complex compliance rules require both time and money for setup and ongoing maintenance of the business to comply. You’ll also need excellent bookkeeping practices and a way to issue payroll for yourself.
How It Works
While S Corporations don’t pay federal corporate taxes, they are liable for some corporate-level taxes on specific built-gains and passive income. But aside from their tax status, S Corps are similar to C Corporations (C Corps) or other corporations in that they are for-profit entities incorporated under (and governed by) the same state corporation laws. They offer similar liability protection, ownership, and management advantages as their C Corp counterparts.
However, S Corps are different because the IRS permits businesses to pass taxable income, credits, deductions, and losses directly to their owners. It’s important to note that this structure is only available to small businesses with 100 or fewer owners, making it a fantastic solution for many self-employed people.
How the S Corporation Stacks Up
What’s the Difference Between an S Corp vs LLC?
LLCs are a go-to structure for small businesses. Both are pass-through entities that offer limited liability protection for their owners, protecting personal assets from business creditors and preventing personal assets from being targeted in lawsuits filed against the company.
LLCs are more flexible than S Corps as they aren’t subject to specific IRS regulations concerning the number and type of shareholders (owners) or other federal and state rules regarding governance, procedure, and distribution of funds.
LLCs are more straightforward to establish than S Corporations, but without a specific tax election, they are still subject to the full self-employment tax liability.
