![]() The IRS has strict requirements for S-corp status, and it’s generally limited to smaller, domestically owned companies. Not every LLC or corporation qualifies for S-corp taxation. With an S-corp, there is no tax at the corporate level, so profits are only taxed once, at the shareholder level.įor more specifics, check out our guide on S-corps or our other articles on the advantages and disadvantages between LLCs and S-corps and the differences between C-corp and S-corp elections. When those profits are distributed to shareholders, the shareholders also pay personal taxes on them. ![]() Traditional C-corporations pay corporate income tax on their profits. If the LLC elects S-corp status, the owners can be company employees, paying employment taxes on their reasonable salary but not on the business’s total profits.Ĭorporations typically elect S-corp status to avoid double taxation of distributions. ![]() By default, LLC owners are self-employed, paying both personal income tax and self-employment tax on their share of business profits. LLCs often choose S-corp status to reduce the owners’ self-employment taxes. Either type of business can choose to be taxed as an S-corp, but the typical reasons for choosing S-corp status vary. Instead, corporate income, losses, deductions and credits pass through to shareholders for federal tax purposes.īecause an S-corp is not actually a business structure, businesses must first be created as either a corporation (normally taxed as “C-corps”) or LLCs (limited liability companies, normally taxed as sole proprietorships or partnerships). An S-corp doesn’t pay corporate income tax. The defining feature of an S-corp is its “pass-through” tax structure. ![]() An LLC or a corporation may elect “S” status if it meets the requirements laid out in the subchapter, the majority of which deal with limits on shareholders and stock. An S-corp is a specific tax designation governed by the tax code’s subchapter “S”-where it gets its name. ![]()
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