How Is an S Corp Different from a C Corp or an LLC?
Unlike traditional C Corporations, also called C Corps, the S Corporation is not subject to corporate income taxes. Instead, the S Corporation receives different treatment for tax purposes that is generally more favorable to the business owner. The S Corp is a pass-through entity for tax purposes, similar to the LLC. This means that the income generated by an S Corporation will flow through to the personal income tax returns of the shareholders, and the S Corp itself generally does not owe any tax liability.
Structuring your business as an S Corp also gives you certain flexibility for managing the ownership of the company. The stock of S Corporations is freely transferable, while the interest (ownership) of LLCs is not. This means that the shareholders of S Corporations can sell their ownership interest without obtaining the approval of the other shareholders.
Another area of concern for business owners is reducing their liability for self-employment taxes, and an S Corporation can have an advantage over an LLC in this area as well. To visualize how much an S Corporation can save you in taxes, check out our S Corporation Tax Calculator.
The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not the profits automatically allocated to them as a shareholder. Depending on how you pay yourself throughout the year, and depending on how your income appears on your personal tax return, you can effectively minimize your tax burden by reducing the amount of your business profits that are subject to self-employment taxes. Talk to your accountant or professional tax advisor about the best way to structure your business earnings for tax purposes.
Although the S Corporation offers significant tax advantages and ownership flexibility, it is not the right choice for every business. There are a few restrictions as well.