S Corporation Election

By: Mark Collini

COMPARISON OF AN LLC VS AN S CORPORATION ELECTION

IRS tax regulations allow for significant tax savings for small business owners who elect S Corporation status for their LLC. These savings often times are in the tens of thousands for many small business owners.

There is a common misunderstanding on the definition of an LLC versus an S-Corporation for self-employes individuals. In the State of Georgia, businesses register with the Secretary of State as to the type of business you choose to create.  The following are the most common business formations in the State of Georgia for self-employed individuals.

  • Limited Liability Company – The most common type of organization. This type may have a single member or multi- members where the business structure separates the business from its owners, limiting the owner’s personal liability for the business’s debts.

    • An LLC may file taxes as a sole proprietor (single member), partnership (multi-member) or may elect s-corporation status (for single or multi members).

    • An LLC is a flow through entity where the taxes are paid to the IRS by the owners.

  • Partnership – Has more than one partner where this entity files taxes as a partnership with the IRS. Also, this flows through to the owner’s individual tax return who pays the taxes.

As you can see, an S-Corporation is not a type of organization that can be registered in the State of Georgia. An LLC can elect to be taxed as an S Corporation if a proper election has been made with the IRS.

Tax advantages of an S Corporation election:

  • The owners are considered investors, not self-employed individuals. Therefore, self-employment taxes are not levied against the investors / owner.  To qualify, an investor / owner must be on a W-2 payroll with “reasonable compensation” as defined by the IRS. K-1 income generated from the S Corp is not subject to self-employment taxes.

  • The Individual pays taxes on the income of the business and may receive distributions which eliminate double taxation vs a C Corporation.

Tax disadvantages of an S Corporation:

  • The investor / owner pays for the filing of an 1120-S tax return in addition to their individual return.

  • Only individuals can be an investor / owner. Other S Corps, LLCs, partnerships or resident aliens may not be an investor / owner.

  • Limit of 100 investors / owners.

  • It must be a domestic entity.

  • The entity must follow guidelines to maintain S-Corporation status or have the status revoked.

  • Limitation to one class of stock.

  • Companies that have a heavy debt burden could run into shareholder basis issues which can sometimes limit the deductibility of business losses against other income.

It is recommended that self-employed individuals contact a professional for advice as to the best strategy for your business and whether electing S Corp taxation makes sense.

Mark & Lee