Key Distinctions Between S Corps and LLCs
The main differences between an S corp and LLC are:
- S corporations have restrictions on shareholders while LLCs do not.
- S corporations require owners working in the company to be paid a salary if they own over 2% while LLCs have no such requirement.
- S corporations require formal records and meetings that LLCs do not.
In essence, the key distinction is that with a single-member LLC, only the business owner reports profit/loss on personal taxes. With an S-corp, all shareholders report profit/loss on personal taxes, allowing for legal and tax benefits similar to an LLC but with S-corp tax treatment by the IRS.
LLC Benefits and Disadvantages
Pros of establishing a single-member LLC include:
- The ability to avoid double taxation.
- Easy setup, typically involving only a one-page form.
S Corp vs. LLC: Tax Considerations
For holding rental properties, a default LLC tax structure is generally better than an S corp due to rental income typically being considered passive income, not subject to self-employment tax.
Business Structure and Tax Classification
An LLC is a business entity offering personal liability protection and the flexibility of pass-through taxation, while an S corp is a tax classification that can be elected by an LLC to potentially save on self-employment taxes.
S Corp Ownership and Structure
- An LLC can act as an investor in a corporation, but an S corporation can only be owned by actual individuals, not other business entities.
- A single-member LLC cannot be designated as an S-corp, but it can elect S corp status to avoid self-employment taxes.
Deciding Between an S Corp and LLC
Small business owners must consider reporting requirements, management ease, and the potential for taxes savings when deciding between forming an LLC or electing S corp status.
Tax Implications and Revenue Treatment
An LLC taxed as an S corp can reduce the amount of self-employment tax, while both an LLC and S Corp can deduct business-related expenses and are taxed at the personal level.
Final Considerations
When comparing an S corp with an LLC, consider liability protection, taxation benefits, and structure to decide which entity best suits the business’s needs. Both offer different levels of each and may influence the decision based on specific circumstances.
Contact Information
For further assistance and questions about incorporating as an S Corp or LLC, contact [email protected].