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What Are S Corporations

Updated: May 10

Are you considering starting a business and wondering what type of legal structure to choose? Two popular options are S corporations and limited liability companies (LLCs). Here's what you need to know about S corporations, LLCs, and their differences.



An S corporation is a type of corporation that is taxed like a partnership or sole proprietorship. It is also known as a subchapter S corporation because it is governed by subchapter S of the Internal Revenue Code. This means that the corporation itself does not pay taxes on its income. Instead, the income is passed to the shareholders, who report it on their tax returns.


An LLC is a flexible business structure that combines the liability protection of a corporation with the tax benefits of a partnership or sole proprietorship. Like an S corporation, an LLC's income is passed through to its owners, who report it on their individual tax returns. However, unlike an S corporation, an LLC is not subject to the same restrictions on ownership and does not have to hold annual meetings or keep formal minutes.


When deciding between an S corporation and an LLC, it's important to consider the differences in taxation, ownership, and management. For example, S corporations are limited to 100 shareholders, all of whom must be US citizens or residents, while no such restrictions exist on LLC ownership. Additionally, S corporations must have a board of directors and hold annual meetings, while LLCs have more flexibility in their management structure.



Another option to consider is a C corporation, which is taxed separately from its owners and offers more flexibility in ownership and management than an S corporation. However, C corporations are subject to double taxation, meaning that profits are taxed at both the corporate and individual level.


In summary, S corporations and LLCs are both popular choices for small business owners looking for liability protection and tax benefits. While S corporations have more restrictions on ownership and management, they offer pass-through taxation and can be a good choice for businesses with fewer than 100 shareholders. On the other hand, LLCs offer more flexibility in ownership and management. They may be a good choice for businesses that want to avoid some of the formalities of a corporation. As always, it's important to consult with a legal or financial professional to determine the best choice for your specific business needs.


 

Units of the 529 plan investment options are municipal securities and may be subject to market value fluctuation. Before investing in a state-specific 529 plan, you should compare your own state's qualified tuition program and any state tax or other advantages it may provide.


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