Understanding S Corps and LLCs
LLCs and S Corps have a pass-through taxation system, meaning profits and losses pass directly to owners who pay taxes on their personal returns, usually at lower personal rates. To qualify as an S Corp, a business must adhere to certain IRS rules:
- Be incorporated domestically
- Have only one class of stock
- Have no more than 100 shareholders
- All owners must be U.S. citizens or permanent residents
Other business structures, like LLCs, are not restricted by these requirements.
Tax Implications for S Corp Owners
S Corp owners pay income tax on their salary and distributions, without facing any corporate tax. By contrast, C Corps incur corporate tax on profits, and dividends distributed to shareholders are taxed again at the personal level.
Frequently Asked Questions
Is an S corp taxed twice?
No, an S corp is not taxed twice. Shareholders report the company’s income and losses on their personal tax returns and are taxed at their individual rates, thereby avoiding double taxation.
How is income taxed on an S corp?
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns on a Schedule K-1 and are assessed tax at their individual income tax rates.
Filing for S Corp Status
S corp status is a tax designation. To file for this status, a business must either:
- Be incorporated as a regular C corporation
- Have filed for LLC status
For state taxes, each state has its unique laws regarding S Corp taxation. Registering as an S Corp is primarily driven by the intent to avoid double taxation, which allows shareholders to report business income directly on their individual tax returns.