With being in the midst of tax season, it never fails as a business owner that you start to see the talk of S-Corporations (S-Corps) circulating the internet.

Many bookkeepers and accountants will start educating about S-Corps and as a business owner, it might be tempting to believe that you should switch to an S-Corp election.

While this can be beneficial for *some* business owners, it’s not a one size fits all type of thing, so before you take any blanket advice, it’s important to understand the difference between the two. 

This is one of the most asked questions that I receive in my DMs and during my AMAs (ask me anything) on stories, so I thought it was time to wrap up all of the information in a blog post so you could find everything you need to know in one place!

Here you’ll learn the difference between an S-Corp and LLC and gain clarity on which one is right for YOUR small business.

Because remember: all businesses are different and just because your business bestie is doing one thing, doesn’t mean that you should do it too. 

So, let’s dive in. ⬇️

What is an LLC?

An LLC, or Limited Liability Company, is a flexible business structure that provides limited liability protection to its owners, commonly referred to as “members.” 

This simply means that before you sell ANYTHING as a business owner, whether it be online or in person, it’s best to form an LLC to ensure that you aren’t risking your personal assets along the way.

For example, let’s say you run into an unfortunate issue with a client and they decide they want to sue. If that happens, your personal assets, such as your personal savings, retirement, house, car, etc. wouldn’t be at risk. Instead, they would only be able to sue and levy against business assets.

In addition to the protection of your personal assets with an LLC, one of the most notable features of an LLC is its flexibility in management and taxation. Unlike corporations, LLCs have fewer formalities and paperwork requirements.

With an LLC, you can choose how you want to be taxed, either as a sole proprietorship/partnership or as a corporation. This flexibility allows you to tailor your tax treatment to suit your specific needs and circumstances.

When starting a business, many people let the development of their LLC trip them up and I get it – it can feel confusing if you’ve never done it before. That’s why I created a step-by-step guide to forming an LLC so you can do so with ease!

And if you’re wondering what mistakes to avoid when it comes to forming your LLC, I’ve got you there too!

What is an S-Corp?

Now that you fully understand what an LLC is, it’s time to break down what exactly an S-Corp is. The most common misunderstanding that I see soooo many people have is that an S-Corp is their business entity. 

In reality, an S-Corporation, or S-Corp, is simply a tax election status you can make as a business owner that allows you to pass through your company’s earnings onto your personal tax return.

This means that S-Corps generally avoid double taxation, as income is taxed only at the shareholder level, similar to how it’s taxed in a partnership or sole proprietorship.

Similar to LLCs, S-Corporations offer limited liability protection, meaning that the personal assets of shareholders are typically shielded from the debts and liabilities of the corporation, except in cases of personal guarantees or misconduct.

How To Know If An S-Corp Is Right For Your Business

Now that you know the basics of LLCs and S-Corporations, the question remains – which tax classification is right for YOUR specific business?

Even though it seems like a simple decision, there are some requirements that you have to meet in order to qualify for S-Corp status, including:

• Eligible Entity Type – to elect S-Corporation status, a business must be a domestic corporation or eligible domestic entity. Eligible entities include domestic corporations, limited liability companies (LLCs) that meet certain criteria, and certain other entities that choose to be treated as corporations for tax purposes.
• Shareholder Qualifications – to qualify as an S-Corp, your business must not have more than 100 shareholders and shareholders must be individuals, certain trusts, estates, or tax-exempt organizations that are U.S. citizens or residents that consent to the election.
• Election Timing – to elect S-Corporation status, your business must file Form 2553, Election by a Small Business Corporation, with the IRS and the election must typically be made within 75 days of the beginning of the tax year in which the election is to take effect, or at any time during the preceding tax year.

In addition to meeting the requirements to file as an S-Corp, there are also some other important factors you’ll want to consider as the business owner:

What are my long-term business goals?

Understanding your long-term goals as a business owner can help you more clearly determine if an S-Corp structure supports your business’s growth and development plans.

Am I willing to adhere to the strict ownership requirements of an S-Corp?

As mentioned above, LLCs have fewer formalities and paperwork requirements than corporations, so it’s important to take those things into consideration and ensure that your business can comply with these restrictions before electing S-Corp status.

How will S-Corp taxation impact my business?

Many people automatically believe that electing as an S-Corp will save them money, but that’s actually only true for SOME businesses! Before electing, it’s important to really evaluate the potential tax implications of S-Corporation status for YOUR business specifically.

Do I have the resources to maintain S-Corp compliance?

S-Corporations have specific compliance requirements, including filing annual tax returns, holding shareholder meetings, and maintaining proper records. With all of these things in mind, assess whether your business can fulfill these obligations on an ongoing basis.

Do I anticipate significant changes in ownership or structure in the future?

Evaluate whether your business is likely to undergo changes in ownership or structure, as S-Corporation status may impact these transitions and require careful planning.

At the end of the day, S-Corp status is NOT for everyone and does have some drawbacks. This is why before making a move, I always advise business owners to consult with a tax professional before electing for your business to have S-Corp status! 

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If we haven’t had the chance to *virtually* meet yet, hey I’m Amber – not a regular lawyer, but a cool lawyer that helps online business owners sell without getting sued. 

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