Selecting the Correct Business Structure
Facts about LLCs and Why You Should Change to an S Corporation First, a quick reminder and review of the most common business entities and structures.
• A sole proprietorship is the simplest form of business entity.
• A partnership is an association of two or more persons to carry on a business and can take different forms (like limited or general partnerships).
• A limited liability company (LLC) is a hybrid entity that offers the option to be taxed as a partnership or a corporation.
• A single member limited liability company is an LLC with a single member, typically treated as a “disregarded entity” for federal tax purposes.
• A C Corporation is what most people think of when it comes to business. A C Corporation files a federal Form 1120 and pays any tax due.
• A professional or personal service corporation is a corporation for certain occupations—typically service professions like attorneys, doctors, and architects.
• An S Corporation is a corporation with a tax treatment similar to a partnership. An S Corporation files a federal Form 1120-S, which passes most items of income or loss to shareholders, who are responsible for reporting that information on their individual tax returns. This is called a pass-through entity.
The Similarities LLCs and S Corporations have much in common.
• Limited liability protection. With both, owners are typically not personally responsible for business debts and liabilities.
• Separate entities. Both are separate legal entities created by a state filing and registration.
• Pass-through taxation. Both are typically pass-through tax entities. While S Corporations must file a business tax return, LLCs only file business tax returns if the LLC has more than one owner.
• Ongoing state requirements. Both are subject to state-mandated formalities, such as filing annual reports and paying the necessary renewal registration fees.
Differences in Ownership The IRS restricts S Corporation ownership, but not that of LLCs. IRS restrictions include the following.
• LLCs can have an unlimited number of members; S Corporations can have no more than 100 shareholders (owners).
• Non-US citizens/residents can be members of LLCs. S Corporations may not have non-US citizens/residents as shareholders.
• S Corporations cannot be owned by C Corporations, other S Corporations, LLCs, partnerships, or many trusts. This is not the case for LLCs.
• LLCs are allowed to have subsidiaries without restriction
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