A business structure known as a S corporation enables pass-through taxation, in which no taxes are paid by the company on its own income. Instead, the money is dispersed to the shareholders, who are then in charge of filing individual tax reports and paying any applicable taxes. In contrast to a C company, which is taxed twice when dividends are distributed to shareholders: once at the corporate level and once at the individual level.
On the other hand, an LLC is a versatile corporate form that provides its owners, also known as members, with limited liability protection. An LLC is a pass-through form for tax purposes, much like a S corporation, which means that the company does not pay taxes on its own revenue. Instead, the money is dispersed to the members, who are then in charge of filing individual tax reports and paying taxes.
When a S corporation owns an LLC, the LLC is classified as a disregarded entity for tax purposes and becomes a subsidiary of the S corporation. This indicates that the profits and losses are distributed to the S corporation’s shareholders and that the LLC’s revenue and expenses are disclosed on the S corporation’s tax return.
An S corporation is only permitted to own certain kinds of enterprises, though. An S corporation cannot, for instance, own another S corporation or more than 80% of a C business. Additionally, when a S corporation owns an LLC, additional state-specific rules must be observed.
Owning an LLC as a S corporation can actually be advantageous financially. An S corporation may be able to lower its overall tax obligation and shield its assets from legal liability by distributing revenue and assets among several entities.
The individual requirements and objectives of the business owner will determine if a S corporation is preferable to a sole proprietorship. The simplest and most typical type of business ownership is a sole proprietorship, which comes with self-employment taxes and no liability protection for the owner.
An S corporation, on the other hand, provides pass-through taxes with the possibility of tax savings and limited liability protection. However, compared to a sole proprietorship, a S corporation has tougher rules and necessitates more administrative effort.
Can a sole proprietor register as a S corporation?
Since a S corporation needs at least two shareholders and a legal structure, a solo proprietor cannot register as one. However, as was said above, a lone proprietor might create an LLC and choose to be taxed as a S corporation. This can offer liability defense and perhaps tax advantages while yet enabling an adaptable corporate structure.