You are ready to start a small business. You have a great business plan for a unique new service or special product.
Inevitably, the question of how to structure your business comes up. Two of the most popular business structures are the limited liability company (LLC) and the S-Corporation. However, under some circumstances you can have the "best of both worlds" by establishing an LLC and then electing S-Corporation status for tax purposes.
- be a United States corporation;
- have 100 or fewer eligible shareholders; and
- have only one class of stock.
Advantage of Filing as an S-Corporation
The primary reason for electing S-Corporation status involves the self-employment tax. An S-Corporation's officers/shareholders who provide more than minimal services to the LLC and receive (or are entitled to receive) compensation are subject to the self-employment tax. These payments are considered wages. On the other hand, non-wage compensation (deriving from dividends or distributions) is not subject to the self-employment tax.