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C-Corporation: The default tax treatment for a corporation is what is referred to as C-Corporation status. A C-Corporation suffers a double taxation effect. This occurs because the corporation is taxed at the corporation level when the company generates a profit and the shareholders of the corporation of are also taxed at the individual level when they receive a dividend from the corporation. To be taxed as a C-Corporation, the corporation need not make any election with the IRS, as this is the default tax treatment for a corporation.

S-Corporation: S-Corporation treatment allows qualifying corporations to receive more favorable tax treatment by the IRS, by eliminating the double taxation effect that occurs with C-Corporation treatment. In order to receive S-Corporation tax status, the corporation must affirmatively “elect” to be taxed as an S-Corporation and all of the shareholders must be qualifying shareholders. S-Corporation treatment transforms the corporation, for tax purposes, into a “flow-through” entity, allowing the profits and losses of the corporation to automatically “flow through” to the individual shareholders. Hence, the corporation itself does not pay federal income taxes. Thus, S-Corporation treatment is generally desirable and more favorable to the shareholder.

LLC: The default tax treatment for an LLC is much like that of the S-Corporation. The default IRS tax treatment for a single member LLC is what is called “disregarded entity” status. In other words, the IRS, for tax purposes only, disregards the LLC and the profits and losses of the LLC automatically flow through to the members who pay the tax at the individual level. A multiple member LLC is treated by the IRS as a “partnership” and the profits and losses of the LLC are attributed to the individual members and tax paid at the individual member level. (Note that, under current IRS rules, an LLC may elect to be treated as an S-Corporation by affirmatively filing the S-Corporation election. Such an election does not change the legal status of the LLC outside of the tax world. While an S-Corporation election may, in some instances, have some tax advantage, the decision as to whether or not an LLC should elect to be treated as an S-Corporation is a decision that should be made only after careful consideration and consultation with a qualified tax professional).

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