Differences between S-Corp and LLC every self-employed hair professional needs to know

When it comes to saving money in taxes, making the S-Corp election is by far one of my favorite strategies. However, a lot of barbers, braiders and hair stylist get these two things confused. There are 3 differences when it comes to an LLC and the S-Corporation every self employed hair professional should be aware of when growing their business. 

#1: An LLC is a business entity and the S-Corp is a tax election

When you're ready to protect your business from personal liabilities, you go to the state to register for an LLC or other asset protecting business entity. But the S-Corporation is not a business entity, it's a tax election. People talk about it like a business entity (myself included), but technically it's a tax election. 

#2: One is at the state level, the other is at the federal level

The LLC is at the state level, you register directly with the state and the federal government won't recognize it any differently than a sole proprietor unless you ask them to tax you differently than the default way (which is taxed as a sole proprietor). 

The S-Corp on the other hand is at the federal level. You have to request this election directly from the IRS and operate as if you're taxed as an S-Corp until you receive official notification that your request has been granted. 

#3: The requirements for each are very different

Requirements for the LLC vary by state, while the IRS states requirements for the S-Corp are:

• Be a domestic corporation
• Have only allowable shareholders
  • May be individuals, certain trusts, and estates and
  • May not be partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

For the majority of self-employed barbers, braiders and hair stylists, these requirements aren't a problem and you're able to get the S-Corp status without any problems.