In determining a business structure, owners may decide to form an LLC, or to pursue an S Corporation. However, these two business entities are not necessarily distinct from each other. A corporation may elect to be treated as an S Corporation by the IRS, but an LLC may also make this election.
An S corporation, or S corp, is not a specific legal entity. Rather, it is a tax classification recognized by both the IRS and the state of Maine. When S corp status is elected, the income of the business "passes through" to the owners. This means that the company does not pay tax on the income, as is usually the case with corporations, and the income is taxed only once. In the state of Maine, businesses formed as partnerships, corporations, or LLCs may pursue an S corp classification for tax purposes.
Limited Liability Company
A Limited Liability Company, or LLC, is a hybrid legal entity which combines the benefits of a corporation with the flexibility of a partnership. In an LLC, the owners are not personally liable for the debts of the business. At the same time, LLCs do not have the formal requirements of a corporation, such as a board of directors or shareholders. If the LLC is owned by individuals and not another corporation, the income for an LLC "passes through" to the owners, meaning that the company does not pay business tax on the income before the owners pay tax.
Both S corps and LLCs must file annual returns with the state and the IRS. S corps file form 1065ME with the state and form 1120S with the IRS. As an LLC, the forms you will file depend largely on how your LLC is organized. In Maine, LLCs may file as a partnership and submit form 1065ME, or file as a corporation and file form 1020ME. At the federal level, if there is only one individual owner of the LLC, you will file the income and losses on form 1040 C, E, or F. LLCs with more than one owner will file form 1065 with the IRS, and report the income as partnership income. An LLC owned solely by a corporation must file a corporation tax return with the use of form 1120 or 1120S.
Combining an LLC with an S Corporation
An S corp need not be organized as a corporation. Instead, you may form your business an an LLC, and then have your company recognized as an S corp. To do so, file form 2553 with the IRS. You must file the form before two months and 15 days of the beginning of the tax year when you want the classification to take effect. As an LLC with a S corporation classification, you will file Maine taxes as an S corporation, utilizing form 1065ME. Because LLCs owned by individuals already enjoy the tax benefits of pass-through income, this option is most beneficial for LLCs that are owned by a corporation and would otherwise be obligated to pay corporate tax.