S-Corporations (S-Corps)


S-Corps still have to act like corporations

  • S-Corporations are just C-Corporations that have elected for a special pass-through entity tax status (S-election)
  • All corporations (C & S) provide legal separation between personal and business assets
  • All corporations have stringent mandates regarding meetings, documents and procedures that must be held, kept and filed in a permanent company record.
  • In the case of a legal dispute as a corporation, if you have failed to maintain record of any of these requirements, the separate legal protection of the corporation can be jeopardized on account of incompliance with corporate regulations.

The tax incentives of an S-Corp lie in the “S”, not the “Corp”

  • Traditionally, S-Corps are recommended given that the income passed through to the owner is not subject to self-employment tax provided the owner takes a “fair and reasonable salary” which is taxed. 
  • It is more beneficial to organize an LLC and apply for treatment as an S-elected entity. 
  • S-elected LLC’s provide the tax incentives of an S-Corp without the corporate regulations. (No self-employment tax)  
  • S-elected LLC’s are required to pay payroll taxes on a selected “fair and reasonable salary.” 

Should you switch to an LLC?

There are various elements to consider before making a final decision.  You should discuss your situation with a MainStreet expert.  The following are the general areas to consider:

You should switch if…

  • You do not currently comply with any/all corporate regulations and don’t plan to start.
  • You are involved in an industry with increased legal liability.
  • You plan to own and operate multiple businesses under the same parent company.

You should NOT switch; if…

  • You are compliant with all corporate regulations.
  • Your S-Corp has built its own credit (3 years) and you rely on that credit.

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