LLC vs S-Corp | What Entrepreneurs Need to Know in North Carolina

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LLC vs S-Corp in North Carolina

When starting a small business in the North Carolina, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in North Carolina. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in North Carolina. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in North Carolina

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in North Carolina?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in North Carolina?

Unlike a limited liability company (LLC) or other business structures, North Carolina S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in North Carolina

Creating a business in North Carolina requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming North Carolina Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in North Carolina does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in North Carolina.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in North Carolina

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in North Carolina is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in North Carolina. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in North Carolina are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in North Carolina are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in North Carolina to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in North Carolina with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

North Carolina State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in North Carolina, it costs $200, which can be paid to the ND Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $125 to the North Carolina Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in North Carolina have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

North Carolina LLC: An LLC can have any number of owners, called members, from starting North Carolina Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

North Carolina S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

North Carolina LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in North Carolina.

North Carolina S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

North Carolina LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

North Carolina S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

North Carolina LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the North Carolina Operating Agreement.

North Carolina S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

North Carolina LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in North Carolina: LLC or S-Corp?

Filing an LLC or S-Corporation in North Carolina requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in North Carolina, you must submit the Articles of Organization to the North Carolina Secretary of State. Your Articles of Organization must include information about your North Carolina LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the North Carolina S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in North Carolina: LLC or S-Corp?

Taxes for LLCs and S-Corporations in North Carolina depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the North Carolina LLC Cost for detailed information.

North Carolina S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate North Carolina LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in North Carolina?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in North Carolina. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in North Carolina.

FAQs

What is an LLC in North Carolina?
An LLC in North Carolina is a type of business entity that combines elements of a corporation and a partnership in terms of liability protection and tax treatment.
What is an S-corp in North Carolina?
An S-corp in North Carolina is a type of corporation that elects to be treated as a pass-through entity for federal income tax purposes.
What are the tax implications of forming an LLC in North Carolina?
Members of an LLC in North Carolina can elect to be taxed like a partnership, a corporation, or a sole proprietorship depending on their circumstances and preferences.
Can a non-resident own an LLC in North Carolina?
Yes, a non-resident can own an LLC in North Carolina, but they may need to register with the state as a foreign entity depending on their level of involvement.
What are the filing fees for forming an LLC in North Carolina?
The filing fee to form an LLC in North Carolina is $125, which can be paid by check or money order.
What are the annual reporting requirements for an LLC in North Carolina?
LLCs in North Carolina are required to make an annual report with the Secretary of State, which includes a $200 fee and updated information about the company’s members and managers.
What are the eligibility requirements for forming an S-corp in North Carolina?
To be eligible for S-corporation status in North Carolina, a company must have no more than 100 shareholders, all of whom are individuals or certain types of trusts or estates.
Can an LLC elect S-corp status in North Carolina?
Yes, an LLC can elect to be taxed like an S-corp in North Carolina, but there are certain eligibility requirements that must be met first.
Are LLCs or S-corporations subject to North Carolina’s franchise tax?
Both LLCs and S-corporations are subject to North Carolina’s franchise tax, which is calculated based on the company’s authorized shares or net worth.
What are the pros and cons of forming an LLC in North Carolina?
Pros of forming an LLC in North Carolina include liability protection, flexible management structure, and pass-through taxation. Cons include initial formation costs and potential difficulty raising capital.
What are the pros and cons of forming an S-corp in North Carolina?
Pros of forming an S-corp in North Carolina include pass-through taxation, limited liability, and potential tax advantages. Cons include additional paperwork and eligibility requirements.
Is it more expensive to form an LLC or S-corp in North Carolina?
The cost of forming an LLC or S-corp in North Carolina is similar, but LLCs may have slightly higher annual reporting fees.
What is the process for converting an LLC to an S-corp in North Carolina?
To convert an LLC to an S-corp in North Carolina, the company must first qualify for S-corporation status with the IRS and then file Form 8832 to elect S-corp status.
How are LLC profits and losses allocated in North Carolina?
LLC profits and losses in North Carolina can be allocated to members in any way that is agreed upon in the company’s operating agreement.
How are S-corp profits and losses allocated in North Carolina?
S-corp profits and losses in North Carolina are allocated to shareholders based on their percentage of ownership.
Are there any restrictions on who can be a member or shareholder of an LLC or S-corp in North Carolina?
There are no residency or citizenship requirements for members or shareholders of LLCs or S-corps in North Carolina, but the eligibility requirements for S-corps should be reviewed before formation.
Can a single-member LLC exist in North Carolina?
Yes, a single-member LLC can exist in North Carolina and can be treated as a disregarded entity for tax purposes.
Can a foreign company form an LLC or S-corp in North Carolina?
Yes, a foreign company can form an LLC or S-corp in North Carolina as long as they comply with state requirements for foreign entities.
What is the difference between a manager-managed and member-managed LLC in North Carolina?
A member-managed LLC in North Carolina is operated by its members, while a manager-managed LLC is run by one or more designated managers.
Can an S-corp have multiple classes of stock in North Carolina?
No, an S-corp in North Carolina cannot have multiple classes of stock.
Is there a minimum or maximum number of members or shareholders required for an LLC or S-corp in North Carolina?
There is no minimum or maximum number of members or shareholders required for LLCs or S-corps in North Carolina, but there may be implications for S-corp eligibility.
What is the annual franchise tax rate for LLCs and S-corps in North Carolina?
The current annual franchise tax rate for LLCs and S-corps in North Carolina is $200 or 1/4 of 1% of the company’s total asset value, whichever is greater.
What happens if an LLC or S-corp fails to pay its annual franchise tax in North Carolina?
Failure to pay the North Carolina annual franchise tax can result in late fees, interest, and may ultimately result in revocation of the company’s privileges to do business in the state.
Can an LLC or S-corp in North Carolina be converted to a different type of business entity?
Yes, an LLC or S-corp in North Carolina can be converted to a different type of business entity, but there may be legal and tax implications that must be considered.
Do LLCs or S-corps in North Carolina require an annual shareholders or members meeting?
There is no requirement for annual shareholders or members meetings for LLCs or S-corps in North Carolina, but it may be recommended for reasons of transparency and good governance.
Are there any industries or business activities that are restricted from forming an LLC or S-corp in North Carolina?
There are no specific industries or business activities that are restricted from forming an LLC or S-corp in North Carolina, but there may be additional requirements or regulations depending on the industry or activity.
Can an LLC or S-corp in North Carolina change its tax treatment down the line?
Yes, LLCs or S-corps in North Carolina can change their tax treatment down the line, but it may require a re-election or other legal procedures.
What is an S-Corp in North Carolina?
An S-Corp is a corporation that meets certain IRS qualifications and elects to be taxed under Subchapter S of the Internal Revenue Code, providing the benefit of limited liability for business owners while retaining pass-through taxation.
How do I form an LLC in North Carolina?
To form an LLC in North Carolina, you must file Articles of Organization with the North Carolina Secretary of State and pay a filing fee.
How do I form an S-Corp in North Carolina?
To form an S-Corp in North Carolina, you must first incorporate your business as a C-Corporation and then file Form 2553 with the IRS to elect S-Corp status.
What are the fees involved in forming an LLC in North Carolina?
The fee for filing Articles of Organization in North Carolina is $125.
What are the fees involved in forming an S-Corp in North Carolina?
The fees for incorporating a business in North Carolina varies based on the type of corporation you choose and depend on various factors.
What are the advantages of forming an LLC in North Carolina?
Some of the advantages of forming an LLC in North Carolina include the ability to protect your personal assets, no double taxation, flexible management structure and no residency or citizenship requirements for business owners.
What are the advantages of forming an S-Corp in North Carolina?
Some of the advantages of forming an S-Corp in North Carolina include the same personal asset protection as an LLC, pass-through taxation but with additional benefits, tax savings, and no limitation on the number of shareholders.
How are LLCs taxed in North Carolina?
An LLC in North Carolina is not taxed as a separate entity, rather profits and losses are passed directly to the business owners and taxed through their individual tax returns (pass-through taxation).
How are S-Corps taxed in North Carolina?
An S-Corp in North Carolina is also taxed as a pass-through partnership, allowing the profits and losses of the corporation to flow through to the shareholders without being taxed as a separate entity.
What are the management requirements for an LLC in North Carolina?
An LLC in North Carolina can be managed either by its owners (members) or a designated manager appointed by the members.
What are the management requirements for an S-Corp in North Carolina?
The management structure of an S-Corp is similar to a traditional corporation, with a board of directors and officers required to be appointed. The shareholders play a passive (non-managerial) role in running the corporation.
Who can own an LLC in North Carolina?
Corporations, partnerships, and individuals can own an LLC in North Carolina.
Who can own an S-Corp in North Carolina?
S-Corps are limited to a maximum of 100 shareholders who must be U.S. citizens or residents.
Are LLCs in North Carolina required to have an operating agreement?
LLCs in North Carolina are not required to have an operating agreement, but it is highly recommended that they do so to define the management structure and operations of the business.
Are S-Corps in North Carolina required to have bylaws?
S-Corps in North Carolina are required to have bylaws, which outline the corporate structure and governance requirements of the business.
What is the North Carolina franchise tax?
The North Carolina Franchise Tax is an annual tax levied on LLCs and corporations doing business in the state, and is based on the amount of capital stock or property used in the state.
How does the North Carolina franchise tax impact LLCs?
LLCs in North Carolina are subject to a Register of Deeds tax of $0.0005 per $1.00 of their authorized stocks and a non-taxable non-income fillings ranging from $200 – $2,000.
How does the North Carolina franchise tax impact S-Corps?
S-Corps in North Carolina may still be subject to the Register of Deeds tax, however they are not generally subject to the state-level corporate income tax.
Does North Carolina have a minimum tax requirement?
Yes, North Carolina requires all LLCs to pay a minimum tax of $200.
What are the annual renewal requirements for an LLC in North Carolina?
In North Carolina, LLCs are required to file an Annual Report with the Secretary of State and pay a $200 renewal fee.
What are the annual renewal requirements for an S-Corp in North Carolina?
In North Carolina, S-Corps need to file Form CD-401S, North Carolina S-Corporation Tax Return and pay taxes annually.
Can an LLC in North Carolina be converted to an S-Corp?
Yes, LLCs in North Carolina can convert to S-Corps as long as they meet the IRS requirements.
Can an S-Corp in North Carolina be converted to an LLC?
Yes, it is possible to convert an S-Corp in North Carolina to an LLC.
What paperwork is required to convert an LLC to an S-Corp in North Carolina?
To convert an LLC to an S-Corp in North Carolina, you need to file Form 8832, Entity Classification Election and Form 2553, Election by a Small Business Corporation with the IRS.
What paperwork is required to convert an S-Corp to an LLC in North Carolina?
When converting an S-Corp to an LLC in North Carolina, you do generally not require any specific paperwork unless you plan to change the structure of operation of the business.
Is North Carolina a good state for forming an LLC or S-Corp?
North Carolina is considered a business friendly state, which means it is an excellent place to start and run an LLC or an S-Corp.
When is the best time to form an LLC in North Carolina?
There is no particular time that is best to form an LLC as it depends on your specific and general needs of your businesses.
How long does it take to form an LLC in North Carolina?
It takes several weeks to process your LLC registration in North Carolina.
How long does it take to form an S-Corp in North Carolina?
It may take approximately 2 weeks for the Internal Revenue Service to process your request for S-Corporation status after you have incorporated.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in North Carolina will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in North Carolina and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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