Liability and Tax Considerations
An LLC offers liability protection for owners. Creditors cannot go after personal assets. An S corporation is a tax election that lets the IRS know your business should be taxed as a partnership. It prevents double taxation. To become an S corp, register first as a C corporation or LLC. As an S corp owner, you are an employee who must pay yourself a reasonable salary. Profits, losses, deductions, and credits are taxed at the shareholder level. An S corp can have one to 100 shareholders and must file with the IRS as an American corporation.
An LLC is taxed on personal income tax returns. S corps can bypass C corps’ double taxation by reporting all income on shareholders’ personal returns. Disadvantages of an S corp include barriers preventing more than 100 owners or having non-U.S. shareholders. Requirements to hold meetings and appoint a board also handicap S corps.
With around $40,000 net income, you should consider converting an LLC to an S-corp when self-employment tax exceeds the S-corp burden.
Choosing Between LLC and S Corp
Why choose an LLC over an S Corp? An LLC offers liability protection for members from lawsuits and debt. As a “pass-through,” LLC income passes through the business to owners who report it on personal returns.
Instead of guessing if an S Corp or LLC is better, contact an expert who will evaluate your situation. An S corp is a tax election either an LLC or C corporation can select. Is it better to be taxed as a corporation or LLC? An expert can provide tailored advice for your specific business needs.