The term “S-corporation” (or S-corp) is often mistaken for type of business entity, but it’s not actually an entity at all. Here’s what you need to know about S-corps:
What is an S-corp?
“S-corp” is a tax designation—NOT a business entity. In fact, both corporations and LLCs may apply for S-corp status, which offers a hybrid model of taxation that allows businesses to use pass-through taxation (like an LLC) and avoid some forms of employment tax (like a corporation).
S-corp status isn’t necessarily beneficial for all businesses, but it also isn’t available to all businesses. Any businesses entity applying for S-corp status must meet certain qualifications (like having less than 100 shareholders) and file Form 2553 with the IRS.
What’s the difference between S-corp and C-corp?
Both S-corp and C-corp are tax statuses. However, S-corp is an elected tax status that qualifying businesses must apply for, while C-corp is the default tax status for corporations. In other words, if you form a corporation, you will file taxes as a C-corporation—unless you apply for S-corp status (and qualify) with the IRS.
Can an LLC be an S-corp?
Yes. LLCs can apply for S-corp status. However, not all LLCs will benefit from S-corp status. It’s a good idea to check with a business attorney or CPA to see whether S-corp status is right for your business.
For more on S-Corps and LLCs, check out our S-Corp vs LLC page.