Confused by the term “S-Corp”? You’re not alone! In this two-minute tip, we break down the often-misunderstood terminology surrounding business structures and tax elections.

The Written Version

When you first start out with a DBA, the legal reality is simple: you are the business. As a sole proprietor, there is no legal separation between your personal assets and your professional liabilities. However, once you take the step to form an LLC, you gain more than just liability protection—you gain a choice in how you are taxed.

The Power of Choice in an LLC
One of the most significant advantages of the LLC structure is its flexibility. Unlike a sole proprietorship, an LLC allows you to decide how the IRS views your income.

If you are a solo owner (or a married couple in a community property state like Texas), you can operate as a disregarded entity.

What is a “Disregarded Entity”? This is a tax term that simply means you and your company are taxed as a single unit. The IRS “disregards” the separation for tax purposes, allowing the income to flow directly to your personal tax return. You are taxed once, avoiding the double taxation often associated with traditional corporations.

Demystifying the “S Corp”
You have likely heard the term “S Corp” and wondered if it is a different kind of company you need to “start.” In reality, an S Corp is not a business entity type—it is a tax election.

The Origin of the Nickname The nickname: “S Corp” comes from Subchapter S of the IRS Code. When this code was originally written, LLCs didn’t exist yet; there were only corporations. Therefore, choosing to be taxed under Subchapter S became known as “S Corp status.”

How the S Election Works: Just like a disregarded entity, the S Corp election ensures that you and your company are taxed once. It is a way to tell the IRS that you want your business income to “pass through” to your individual tax return, potentially saving you money on self-employment taxes depending on your business’s revenue.

Key Takeaways

• A DBA is a Sole Proprietorship: You and the business are one and the same.
• LLCs Offer Flexibility: You can choose the tax structure that best fits your financial goals.
• S Corp is a Tax Status, Not a Building: You can have an LLC and “elect” to be taxed as an S Corp.
• Single Taxation: Both disregarded entities and S Corp elections are designed to ensure you are only taxed once on your business earnings.

Deciding which election is right for your social enterprise depends on your specific financial situation and long-term goals.