What Is An S Corporation?

What is an S corporation? This is a question I get a lot. Typically, this question comes to me like this: “Should I file as an LLC or an S corp?” I'm here to tell you that they can do the same thing. 

An S Corp is a tax status. I've talked about this before if you follow me in other places, or you call my office and we've had a conversation. You may have heard this song and dance before, but I will shout it from the rooftops. I want you to be aware that you could be shooting yourself in the foot if you think just an S Corp is enough or just an LLC will help you for tax purposes. So again, an S Corp is a tax status. An LLC is filed with the Secretary of State and as your business entity. Two separate things. So let's dive into that.

First, if you haven't read my other blog posts on LLCs, please go back and look at those to understand the importance of an LLC, an operating agreement and all that good stuff. Now, an LLC is registered with your Secretary of State–that is your business entity. If you have an LLC, you will sign contracts as your business name, LLC, Limited Liability Company, however you designate it. For instance, if I go hire a new VA, I will sign under my LLC. That means that VA is being paid and contracted by my business, not me personally.

Now, your S corp status is that tax status. That's how the IRS will tax your LLC. When you apply for your EIN number, if you're a single member LLC, you will just default as a sole proprietor. Typically fine for most people from the get go. Now, once you start making some profits, it might make sense to switch to an S corporation tax status.

Now, your LLC that defaulted as a sole proprietor, can file the paperwork and elect to become taxed as an S corporation. If you do not have an LLC and you just go for S corporation status, that means you will be taxed as an S corporation but you will not have the legal protections of an LLC.

Your CPA likely told you, you should be an S corp. You filed everything and you became an S corp. That does not mean that you have legal protection as a business entity, this just means that you are now taxed as an S corp. This is a very important distinction. Your S corp means zilch if you get sued. It does not protect your house, your personal assets, your future earnings, or your retirement. Nothing. It is just the way you're taxed. For maximum protection, we want to have that business entity there, like an LLC. Then, if it makes sense to be taxed as an S corporation, you can tax your LLC as an S corporation. And if you have questions, let me know.