One of the most misunderstood concepts we hear about from entrepreneurs is the “S-Corp” as it relates to limited liability companies (LLCs). We often hear business owners seeking to file paperwork to form an “S-Corp as opposed to an LLC” because the LLC is not best for them. Let’s bust this myth.
In this scenario, an S-Corp is a TAX CLASSIFICATION. An LLC is a legal entity, a creation of state law that must choose a tax classification, since it alone is not recognized as one by the IRS. So, you can have an LLC that is treated like an S-corp for tax purposes! It doesn’t have to be an “either or”. Here’s what LLC owners can choose to be taxed as:
• as a disregarded entity (single member LLCs) • as a partnership (this is the default classification given by the IRS to multi-member LLCs unless another is elected) • a c-corp, • an s-corp (in certain circumstances)
Owners of LLCs can choose whichever classification that they a) qualify for and b) is more advantageous for them. This is a decision that should be made in close consult with a competent tax professional.
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