Entity strategy

LLC, S corporation, or C corporation?

Your legal entity and your federal tax classification are related, but they are not always the same thing. The best structure depends on how the business earns money, how owners are paid, liability concerns, administration, and future plans.

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Start with the difference between legal structure and tax treatment

An LLC is a state-law business structure. For federal tax purposes, an LLC may be treated as a disregarded entity, partnership, S corporation, or C corporation depending on ownership and elections. A corporation may also qualify to elect S corporation status when eligibility requirements are met.

Questions to consider before changing your entity

  • How many owners are there now, and could ownership change?
  • Is the owner actively working in the business and taking money out regularly?
  • Will the business run payroll and maintain separate books and bank accounts?
  • Are there plans for investors, additional owners, or a future sale?
  • Do the expected tax savings justify the added payroll, bookkeeping, and filing costs?

Why S corporation status is not automatically better

An S corporation can be useful in the right situation, but an owner who performs services generally needs a defensible compensation approach and payroll compliance. The business also takes on a separate tax return and additional recordkeeping. The decision should be based on the complete numbers, not only on avoiding self-employment tax.

Before making an election or restructuring, review the expected profit, owner compensation, payroll costs, state filing requirements, and long-term plans together.

This page provides general educational information and is not a substitute for advice based on your specific facts.