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Difference between S-Corp and Sole Proprietor taxation in an LLC?

Asked by: Mckenzie  — 8 August, 2012

Please explain the difference of electing to be taxed as a Sole Proprietor versus S-Corp in an LLC. I know both are pass-through. Does the amount of members in the LLC make a difference, one versus two or more?

Answered by: admin  — 8 August, 2012


In short, one of the main differences in having your LLC taxed as a sole-proprietorship as opposed to an S-Corp, is that by electing to have the S-Corp tax structure, you would gain certain self-employment tax benefits.

There would be a few limitations the LLC would have to comply with if it elected to be taxed as an S-Corp, such as not being able to have any members who are non-U.S. residents, as well as not being able to have any corporations or partnerships as members.

The amount of members may make a difference, depending on the intentions of how the profits would be shared and such, the type of members in the LLC, etc. Typically, when an LLC is owned by one individual, it’s considered a single-member LLC, and by default taxed as sole-proprietorship/disregarded entity. When there are multiple members, the LLC is generally referred to as a Multi-member LLC, and by default taxed as a partnership.

Being there are many caveats to all the different possibilities, it would be strongly advised to consult a licensed accountant familiar with the S-Corp tax structure to find what would fit your business plan the best.

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