Getting the S Corp Status: What Are S Corp Requirements?

Business structure trips even the savviest entrepreneurs up. S Corp, C Corp, LLC—what do they require and which is right for your business?

If you’ve been trying to decide between an LLC or an S Corporation, keep reading for our handy guide breaking down S Corp requirements and why you might want to choose an S Corp.

What Are the Different Business Structures?

Businesses are structured in different ways, depending on who runs them, what their goals are, and how they operate. Business classifications are for tax purposes and dictate how a business pays taxes and how that business must operate to do so. 

The main business classifications are an LLC, or limited liability company, and a corporation. When business owners are trying to decide between LLC vs S Corp, understanding the structure of each might help.

1. The LLC. There is no actual “LLC” classification on taxes—a single owner is a sole proprietor and multiple owners are taxed as partnerships. LLCs are a separate entity from the business owner(s), meaning you are protected personally in the event something happens to your business. 

2. The C Corp. A C Corporation is set up in the same way as an LLC for tax purposes, in that the business and owners are separate. However, corporations can operate on multiple continents and are preferred by outside investors. The biggest drawback is that owners pay a corporate income tax to operate at this level.

3. The S Corp. Enter the S Corporation, the best of both worlds. S Corps get the perks of C Corp, but aren’t taxed the same. Let’s break it down.

The S Corp

The S Corp is not considered a business entity—and therefore, isn’t taxed as one. LLC and C Corp business owners must file and pay personal taxes, and they must also file and pay for the business as its own entity. A lot of it really comes down to the Medicare and Social Security taxes you’ll pay.

For example, if your business clears $200,000 this year, you’ll pay Social Security and Medicare on the whole amount. If you file as an S-Corp, however, paying yourself a salary of $100,000, it’s treated as a business expense and you’ll only pay taxes on the $100,000 you received.

LLCs can file as an S Corp, but there are certain requirements. Most LLCs choose to operate that way because the operation standards are more relaxed. An S Corp classification can save you money, but you have to adhere to stricter operations rules.

What Are the S Corp Requirements?

To file as an S Corp, a business must meet the following requirements.

  • Have fewer than 100 shareholders
  • All shareholders are US citizens or resident aliens
  • All business loss/profit is passed through to owners each year

How Should I File?

Tax classifications can be incredibly confusing. The good news is you have time to figure out the best path—business owners get 75 days to decide which is right for their business. If you’re confused and don’t completely understand S Corp requirements, your accountant or legal professional can help walk you through and make the best choice.

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