The Accounting Differences Between an LLC, C-Corp and S-Corp Tax Structure

Business owners can choose whether to register as a limited liability company (LLC) or a corporation and have 75 days from the formation of the business to do so. If choosing to register as a corporation then they also must make a choice between S-Corp or C-Corp structures. LLC, C-Corp and S-Corp all have their own unique accounting procedures when dealing with government taxes.

LLC Tax Structure

When using the LLC structure it gives the owners the freedom to keep their personal assets separate from their company’s. The Internal Revenue Service (IRS) considers each owner as a “member” of the company and the owners use the LLC as their “pass-through” entity for the members to prevent becoming double taxed on both personal income and company revenue.

Accountants for single member LLC’s need to separate the owner from their member status for the purposes of paying social security, health insurance and employment taxes. In this same scenario the owner will not be separated from the company when it comes to income tax purposes.

S-Corporation Tax Structure

A subchapter S-corp is an option available to most small businesses with single or multiple shareholders. One of the most recognized benefit of these type of corporations is the minimal corporate income taxes and payroll taxes they are responsible for. The accounting procedures that must be followed with handling a S-Corp can be very complex and confusing.

Each shareholder of the S-Corp must file their income taxes every quarter rather than annually. One strategy used to lessen the burden of filing income taxes so often is for the shareholder to take just one payment for their entire yearly salary rather than multiple payments throughout the year. This makes filing the quarterly income taxes less complex since three of the four quarters will show no income.

C-Corporation Tax Structure

This is the most common structure used for by major corporations. Ownership of the company is established through the distribution and selling of stock shares. The income earned by the company is calculated and viewed differently than a S-Corp by the IRS.

The company will pay taxes on the revenue earned since it is it’s own entity and the individual shareholders will also have to pay income taxes on their earnings. The double taxation method makes it the least popular structure for small businesses.

LLC or Corporation

LLC business structure has more flexibility with their tax reporting options and has the benefit of including the members on the management payroll to save money on taxes. The United States does not recognize LLC’s overseas so companies looking to operate offshore will need to choose a corporation structure. In addition to operating overseas, companies that are preparing for an IPO or getting outside investors will also need to choose the corporation structure.

S-Corp or C-Corp

The most common corporation structure is S-Corp with about 62% of corporations filing under this structure each year. The main reason for this is to avoid paying corporate income tax. All of the businesses profits or losses are passed through to the owners each year when they file their personal income taxes.

Corporations can have a maximum of 100 shareholders when filing with the IRS as an S-Corp. Obviously there is no maximum shareholders for the C-Corp since this structure is designed for companies that are looking to go public and sell their stock shares.

How to Choose the Right Tax Structure

Every situation is different so none of these business structures are better than the other when incorporating a business. This article was a quick and simple breakdown in the differences between each but in actuality the exact details are very complicated. For most small businesses though the fine details will not apply to them so in return will not factor into whether they choose to become an LLC or Corporation.

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