Every business requires an entity structure for tax purposes. Common business entities include S Corporation, C Corporation, and Limited Liability Company. Each structure has pros and cons. The best way for you to identify the structure that best fits your business is to consult a commercial lawyer.
Perhaps the most significant differences between S Corps, C Corps, and LLCs relate to taxes. An S Corporation is a limited liability company, corporation, or limited partnership that the Internal Revenue Code treats under Subchapter S rules. To the surprise of many business owners, an S Corporation does not necessarily need to be a “corporation;” it only needs to meet the IRS qualifications of an eligible entity.
If you are starting or acquiring a business in California, or changing your business structure, contact Eric D. Anderson Law, LTD. A business attorney in Redlands will evaluate your situation and provide legal guidance based on local, state, and federal laws.
A small mistake when structuring your business could lead to extensive legal and tax problems. Our commercial lawyers will protect your interests.
Here is a brief overview of S Corporations:
Tax Implications of the S Corporation Entity Structure
As previously mentioned, S Corporations are taxed based on the Subchapter S rules of the Internal Revenue Code. A Biz Filings explains, S Corporations are pass-through tax entities. There is no corporate tax; rather, the owner reports the profits and losses on his or her personal tax return.
S Corporations can have multiple shareholders, each of whom will pay taxes based on his or her share of the S Corporation ownership. For example, if the S Corp makes $50,000 in profit and two shareholders each own 50 percent of the S Corporation, then each owner will pay taxes on their $25,000 income from the S Corporation.
Which Offers Better Limited Liability Protection – An S Corporation or an LLC?
S Corporations, C Corporations, and Limited Liability Companies all offer a certain level of limited liability protection. Depending on the structure, the owners are usually not personally responsible for business liabilities and debts.
However, it is important to remember that the main purpose of classifying a business as an S Corporation relates to taxes. An LLC can be an S Corporation, but the S Corporation classification itself does not offer extra liability protection. Therefore, it is sometimes a smart decision for small business owners to establish themselves as limited liability companies – even if they are taxed as S Corporations.
When Is It Better NOT to Elect “Subchapter S?”
Many business owners elect Subchapter S because it reduces their payroll taxes. However, according to S Corporations Explained, there are several situations when this election does not reduce tax liability. These include:
- When the shareholders earn more than the S Corporation;
- When a C Corporation elects to be treated as an S Corporation, but has significant operating loss deductions to carry forward;
- Or when shareholders reside in a low-tax or no-tax state, but they owe out-of-state, non-resident income tax.
If you have questions about S Corporations, C Corporations, or Limited Liability Companies in California, contact Eric D. Anderson Law, LTD. Call 909-283-5494 today to schedule a consultation with a Redlands commercial lawyer.