Differences between LLC, S Corp, C Corp, Self Employment Tax, LLC taxed as an S-Corp
In this blog post, I will address briefly the main differences and similarities between the Limited Liability Company (hereinafter LLC), S Corporation (hereinafter S-Corp), and the C Corporation (hereinafter C-Corp) from the administration to the taxation point of view, and why some LLCs elect to be taxed as an S-Corporation to reduce their self-employment tax bill.
First of all, LLCs, S Corporation, and C-Corporation all have limited liability protection, meaning the owners (member/s or shareholder/s) will not be personally liable for the company's debt.
The LLC has a much simpler administration structure. The owner of the LLC is called Member. The LLC is managed by a manager or manager, which can be members of the LLC (what can be called Member-Managed LLC) or by a person different than a member (Manager-Managed LLC). The Manager is similar to a CEO.
I must address from the beginning that S Corporations and C Corporations are practically the same, but they are different from the taxation point of view, hence Corporations structure are as follows: The Shareholders elect the board of directors who will manage the corporation and hence take the major decisions, and the board of directors elects the officers who take on the day to day activities (CEO, CFO, etc.)
S-Corporation is a tax status, so the Management Structure of the S-Corporation will depend on whether an LLC or C-Corporation is the one electing to be treated as an S-Corp.
LLCs are what is called "pass-through" entities, meaning the owners report their share of the LLC profits in their personal tax return provided that the owner of the LLC is a person. This is what allows me as a foreigner to not pay taxes if my LLC did not carry U.S. trade or business, because, in short, I am not supposed to fill Form 1040 (personal tax return) because I am not a U.S. Person (national nor resident), but I will have to fill some information returns.
U.S. Persons can also benefit from this structure to avoid double taxation as in the case of the C-Corporation, but might be liable to pay "self-employment tax", and then "income tax" on that same LLC profit. 50% of the SE Tax paid can be deducted from the income tax balance. To reduce the SE Tax, a U.S. person might sometimes elect the LLC to be treated as an S-Corporation.
An S Corporation is just a tax status, similar to the pass-through characteristic of the LLC.
C Corporations and LLCs can elect to be taxed as an S Corporation.
All the members/shareholders of the LLC or C-Corporation have to be U.S. Persons for the company to be eligible for the S Corp status, and the company can't exceed a certain amount of owners
Foreigners can't be part of a company taxed as an S-Corporation.
C-Corporations suffer from something called double taxation, meaning the dividends will get taxed twice, first when the Corp will levy withholding tax when paying the dividends to the shareholder, and then the shareholder is supposed to pay taxes again as income tax on that same profit. The benefit to have an C-Corporation is the ability to attract investors easier, and be able to be in the stock market, among other benefits.
LLC taxed as an S Corporation
Since LLCs already have the pass-through characteristic, the main reason for an LLC to elect to be taxed as an S Corporation is to reduce the self-employment tax, and to keep the management simplicity in comparison to the C-Corporation
C-Corporations taxed as an S Corporation
If I wish to keep the Corporation structure and avoid double taxation, I would elect the C-Corp to be taxed as an S-Corp
About the Author:
Jean Franco Fernández Clark
Corporate & Tax Lawyer.
Speaks English/Spanish/French/Italian/Russian. 我学习汉语。