Taxation of LLCs vs S Corps
Who pays more taxes, an LLC or S corp? It depends. Both can be taxed at personal rates. If an LLC is taxed as a sole proprietorship, the member reports income and expenses on a personal return, paying personal income tax on profits. S corps can have 100 or fewer US citizen shareholders, issuing one class of stock.
Typically, an LLC taxed as a sole proprietorship pays more taxes while an S corp pays less. An S corp pays taxes on salary only. If salary is less than total profits, an S corp usually has a lower tax bill.
There’s no specific “LLC income tax." Instead, LLCs can be taxed as sole proprietorships, S corps, C corps or partnerships.
S corps have lower self-employment taxes than LLCs because S corp owners can be employees, paying these taxes on salary only. Also, S corps are limited to 100 shareholders while LLCs can have unlimited members.
If an LLC is taxed as a corporation, shareholders can be treated as employees, enjoying corporate employment tax benefits. Disadvantages include double taxation.
In summary, S corps offer more advantageous taxes than LLCs for many small businesses. However, LLCs provide greater structure flexibility.
Tax Implications and Entity Choices
LLCs and S corps have different tax implications. S corps allow owners to minimize taxes by paying themselves a reasonable salary on which they pay taxes. Additional profits are not taxed until distribution. LLCs pay taxes on all profits unless taxed differently.
S corps have shareholder limits and ownership requirements that LLCs do not. However, LLCs provide more flexibility in the allocation of profits and losses. Both entity types have pass-through taxation.
The number of LLC members affects taxation options. Single-member LLCs default to sole proprietorships unless owners choose otherwise. Multi-member LLCs default to partnerships but can elect S corp status.
S corp owners only pay self-employment taxes on salaries. Thus, S corps offer self-employment tax savings.
In summary, S corps can provide more tax savings, but LLCs allow more flexibility in structure. Entrepreneurs should weigh options carefully when choosing business entities.
Specific Tax Questions
S Corp vs LLC Taxes
Do you pay less taxes with an S corp? S Corps have more advantageous self-employment taxes than LLCs. S Corp owners can be considered employees and paid “a reasonable salary." The disadvantage of an LLC taxed as a corporation is double taxation.
LLC Filing as S Corp
Should an LLC file as an S Corp? As an LLC owner, you’ll pay self-employment taxes on net earnings from your business. An S corporation classification would allow you to only pay those taxes on the salary you take from your company. However, multi-owner LLCs need to file business returns.
Moreover, non-residents and U.S. citizens can be LLC members but not S corporation shareholders. Other similarities include pass-through taxation. LLCs aren’t taxed on a business level.