Find Out Why LLC’s and Corporations Choose S-Corp Status to Save on Taxes

Find Out Why LLC’s and Corporations Choose S-Corp Status to Save on Taxes

Find Out Why LLC’s and Corporations Choose S-Corp Status to Save on Taxes

When it comes time to select your business’s legal structure, a corporation might seem like the least appealing option for one reason: taxes.

Out of all the business structures, the corporation faces the most burdensome and notorious taxes. Because a corporation is a separate legal entity under the law, it is taxed on its income at the corporate level. Then shareholders must pay taxes on dividends. Hence, the income flowing through a corporation is “taxed twice,” which results in a high tax burden and diminished earnings.

An LLC, on the other hand, enjoys pass-through taxation. The law does not regard an LLC as being a separate legal entity from its owners (barring an election to be treated as a corporation), and the LLC does not pay taxes on any income it receives. Instead, earnings are taxed solely at the personal level. 

Regardless of whether your business is a corporation or an LLC, you can take advantage of significant tax benefits above and beyond what even an LLC can provide by electing S-corporation tax treatment for your business.

Here’s what you need to know before you decide:

1. An S-Corporation Is Not a Legal Entity 

An S-Corporation is not a separate kind of legal entity, nor is it regarded as a corporation under Texas law. One does not form an S-corporation like a corporation or an LLC. The designation speaks only to the way the business has chosen to be taxed under the federal tax code.

2. Corporations and LLCs Can Gain S-Corporation Distinction

A business must form as either a corporation or an LLC before electing to be taxed as an S-corporation. For a corporation, it must formally elect to be taxed as an S-corporation when it forms. For an LLC, it must form as an LLC, elect to be taxed as a corporation, and then make another election to be taxed as an S-corporation.

3. An S-Corporation Must Meet Specific Requirements

As provided for in 26 U.S. Code § 1361, the IRS imposes strict operational and compliance restrictions on S-corporation, requiring that the S-Corporation:

  • Be a domestic corporation
  • Have shareholders that are individuals, trusts, and estates, not partnerships, corporations, or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Offer only one class of stock
  • Not be an ineligible corporation, such as insurance companies or domestic international sales corporations, among others.

The pursuit of favorable S-corporation tax treatment can be tricky, and any business considering an S-corporation tax election should pursue professional legal counsel for this issue. Specifically, legal counsel can not only ensure the smooth formation of your business as either a corporation or LLC but also guide the proper election of your tax preference and your compliance with S-corporation requirements.

There are few things more frustrating than assuming you made the proper elections yourself only to find that you made a mistake along the way, and now you owe a massive tax bill. Retaining counsel from the beginning prevents such errors. Not to worry, however; counsel can also help mitigate your future tax liability by fixing any election or compliance mistakes and assisting with refiling for the following tax year. 

Have you been hit with a substantial corporate tax bill only to pay again at the individual level? What strategies do you have in place to avoid being double-taxed? Avoid hefty tax bills that cut into your net earnings. Let’s talk about how an S-corporation might ease your tax burden. Schedule a consultation. 

Tags

Contact us to learn how we can help your business