An S-Corporation, or S-Corp, is not a corporation at all, instead it is a business structure that can be applied to other forms of business entities. For instance, an LLC can be an S-Corp. How can a business and an LLC? Simple, unlike an LLC or a C-Corp, an S-Corp refers to how a business chooses to be taxed under IRS Code.
The IRS classifies businesses as sole proprietorships, partnerships, C-Corps, or S-Corps. LLC’s inherit pass-through taxation and therefore do not have a specific tax classification. However, an LLC may elect to be treated as an S-Corp, allowing for many businesses to save money on their self-employment taxes. Self-employment taxes are Medicare and Social Security taxes. Savings can be found when choosing an S-Corp.
When to choose an S-Corp
According to the IRS not every business qualifies to be taxed as an S-Corp. There are three key items that prevent an LLC from being an S-Corp:
- The LLC has Foreign Ownership
- The Owner is a Nonresident Alien
- The LLC is ultimately owned by a Corporation or a Partnership
In addition to this, there is also a cap on the number of owners of an S-Corp can have. Currently, the maximum number of owners cannot exceed 100.
If your company does meet the criteria for an S-Corp you may still be hesitant to make the switch. The major drawback of an S-Corp is the substantially more difficult tax forms that are required. However, the savings incurred by switching often outweigh the additional work come tax season.