I’ve had many clients and prospective clients ask me to break down the differences and pros and cons of a LLC versus a S-Corp. The difficulty with answering the question is that the question is asking for structural differences, but when referring to a S-Corp, one is referring to a tax classification.
A S-Corp is a qualifying corporation that is taxed under Subchapter S of the Internal Revenue Code. Subchapter S is a form of taxation known as “pass-through” taxation, in that the profits and losses of the company are “passed through” to the shareholders, who are then responsible for reporting their share of those profits and losses on their own tax returns and paying the appropriate share of taxes, regardless of whether or not any money is actually distributed from the company to the shareholders.
You’re now probably wondering what a C-Corp is. C-Corps are taxed under Subchapter C. It is the default classification for new corporations, and is known as “double taxation”. The corporation pays taxes on its income; the shareholder pays the tax on any dividends paid to them at the dividend rate. So if a C-Corp makes $100,000 in taxable income, it pays the tax on that income; then if it pays $1000 dividends to its shareholders, the shareholders then pay taxes on that $1000 — hence the “double taxation” moniker.
LLCs can also elect corporate taxation (assuming they qualify) under Subchapter C or S (by default, single-member LLCs are disregarded for federal [and sometimes state] taxes, multi-member LLCs are taxed as partnerships). Therefore, when discussing the entity structure, the better question is not LLC versus S-Corp or C-Corp, but LLC versus corporation (which should also include a discussion about the state where the company is to be formed). Once the entity form has been decided, then the tax classification of the company can be discussed.
Leave a Reply