S corporations are those that pass corporate income, losses, deductions. and credits through to their shareholders for tax purposes, according to the IRS. An S corp. is not a business entity but a designation that refers to the way a business has chosen to be taxed under the Internal Revenue Code.
When defining S corporation examples, it's important to understand where this kind of business entity stands within the various types of corporations that exist. You nearly always create a corporation based on its tax advantages. So, the Internal Revenue Service is the best place to turn for an explanation. According to IRS.gov:
"S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes."
The IRS says that shareholders of S-Corps report "income and losses on their personal tax returns and are assessed tax at their individual income tax rates." The advantage is that this this allows S-Corp to avoid double taxation on the corporate income. In selecting among the types of corporations available, you need to determine what the best form of business ownership is for your circumstances.
What Is the Best Form of Business Ownership?
The best types of business ownership, or the best types of corporations, really depend on your business needs. In addition to an S-Corp, you have several options, including a C-Corp vs. LLC, as well as various types of LLCs. According to RaShea Drake, a B2B analyst with Verizon Business:
"A limited liability company offers more protections and separations to businesses than sole proprietorships and is a combination of a corporation and partnership. Your personal assets and company assets are separated in most cases, and your profits and losses are not taxed at the corporate level."
Sammi Caramela, in a June 18, 2018, article titled "How to Choose the Best Legal Structure for Your Business," published in Business New Daily, notes that a limited liability company is sort of a hybrid structure that helps owners and shareholders limit personal liability but still enjoy the tax benefits and flexibility of a partnership. Upcouncil.com adds that there are several types of LLCs including, but are not limited to, single-member LLCs (also called sole propiertorships), general partnerships (which would include several partners), family limited partnerships, and even anonymous LLCs, where the partners/owners are not disclosed except on required government documents.
In addition to the various types of LLCs, Caramela says that there are also several types of corporations, another form of business ownership:
- C Corporations, owned by shareholders, are taxed as separate entities.
- S-Corps, which avoid double taxation, much like partnerships or LLCs. Owners also have limited liability protection.
- B Corporations, otherwise known as benefit corporations, which are for-profit entities structured to make a positive impact on society.
- Closed corporations, which are typically run by a few shareholders, and are not publicly traded and benefit from limited liability protection.
- Nonprofit corporations, which exist to help others in some way and are rewarded by tax exemption.
So, the best kind business ownership really depends on your tax and legal situation.
What Is an S Corporation?
Incorporate.com explains that an S-Corp is similar to a C-Corp. An S-Corp. offers investment opportunities, perpetual existence, and that protection of limited liability. "But, unlike a C-Corp, S-Corps only have to file taxes yearly and they are not subject to double taxation," says Incorporate.com, adding,
S-Corp shareholders for the "benefit of limited liability and to avoid double taxation," says Upcounsel.com. There are some benefits to forming an S-Corp Upcounsel explains that using an S corp. can also decrease self-employment tax, as well as overall tax liability. And shareholders cannot be held personally responsible for the company's debts or liabilities.
What Is an Example of an LLC?
S-Corps may seem to offer some similar benefits as LLCs, namely limited liability for its shareholders or owners. But the two are quite different. Unlike S-Corp, LLCs can be owned by trusts, partnerships, other LLCs, C-Corps, and limited partnerships, according to llc-made-easy.com. By contrast, S-Corps can only be owned by individuals. This can make S-Corps "unattractive for certain asset-protection purposes," adds llc-made-easy. And, with LLCs, there is no limit to the number of shareholders; by contrast, an S-Corp. can have only 100 shareholders.
An example of an LLC is Chrysler Group LLC, the Auburn, Michigan-based automaker with annual revenue of more than $80 billion. Clearly, just about any company can be an LLC. Indeed, it's better to ask what kind of company cannot be and LLC. For that, it's best to turn back to the source mentioned at the beginning of this article: the IRS. "A few types of businesses generally cannot be LLCs, such as banks and insurance companies," says the IRS. But nearly every other type of business can be an LLC, so types of LLCs are nearly limitless. And an LLC's members, or owners, may include individuals, corporations, other LLCs and foreign entities, says the IRS.
What Is a Limited Company Example?
A limited company is a type of business structure that has been incorporated into a legally distinct body or "person," according to debitoor, adding that any business owner who runs her business as a limited company will:
- Be legally distinct from the people who run it.
- Keep its finances separate from her personal finances.
- Be able to own assets and keep any profits the company makes after tax.
There are essentially two kinds of limited companies, debitoor explains: private and public limited companies. Private limited companies are prohibited from offering shares to the general public, while public limited companies (PLCs) can raise capital by offering shares. An LLC is an example of a private limited company. In any limited company, the liability of members or subscribers is limited to what they have invested in or guaranteed to the company.
The Bottom Line: S-Corps vs. LLCs
With any of the types of ownership options, discussed above, the name of the game is limiting the liability of share holders or owners. An S-Corp focuses on limiting member, investor, or owners' tax liability. LLCs and S-Corps both help owners or shareholders limit their liability. Additionally, says Wolter Kluwer, they both are separate entities, that is, separate and apart from the owners, other than the specific funds the owners or shareholders have invested. And they both offer pass-through taxation, where no income taxes are paid at the business level; rather, profit and loss is passed through to the owners' personal tax returns.
The differences, and they are big differences, are that LLCs can have an unlimited number of members, as noted, while S corps. can have no more than 100. Those who the IRS calls "non-resident alien shareholders" – that is, people who are not U.S. citizens and live outside of the United States – can be members of LLCs but not C-Corps, and S-Corps cannot be owned by corporations. (Legal immigrants in the U.S. can be members of S-Corps.) Importantly, in an S-Corp, ownership interests are freely transferable, meaning that one owner can sell her interest without getting permission or approval of other owners, says llc-made-easy.com. In an LLC, however, for an owner to sell her shares, all other owners must agree.
So which type of business-ownership structure is best for your business really depends on your needs. Whichever you choose, take a good look at the similarities and differences, to see if one of the many types of LLCs is best for you, or if S-Corp examples provide the best way forward for your business.
- Wolter Kluwer: Compare S Corporation vs LLC: Differences & Benefits
- Debitoor: Limited company – What is a limited company?
- IRS.gov: S Corporations
- Entrepreneur: Choose Your Business Structure
- Business News Daily: Sammi Caramela, How to Choose the Best Legal Structure for Your Business
- Upcounsel.com: What are the Different Types of LLC: Everything You Need to Know
- Incorporate.com: What Is an S Corporation (S Corp)?
- llc-made-easy.com: S Corporations and LLCs Compared
- Corporate Office Headquarters: Chrysler Group LLC
- IRS.gov: Limited Liability Company (LLC)