LLCs can choose to be taxed as S corps. S corps let owners save on employment taxes by distributing profits instead of salaries. Profits distributed as dividends avoid payroll taxes. To become an S corp, an LLC files Form 2553.
Key Differences Between LLCs and S Corps
An S corp can only have up to 100 shareholders. All must be individuals or certain trusts. An LLC allows for more flexible management and ownership. An LLC taxed as an S corp can save money because owners pay income tax but not payroll tax on distributed profits. An S corp saves on payroll taxes, but you must pay yourself a reasonable salary based on your position. Salaries are subject to payroll taxes.
LLC owners must pay self-employment taxes for all income. S-corp owners may pay less on this tax, provided they pay themselves a “reasonable salary.” LLCs can have an unlimited number of members, while S-corps are limited to 100 shareholders.
Tax Considerations for LLCs and S Corps
To decide whether an S corp or LLC is better for your specific situation, consider your profit and desired salary. You should weigh projected profit against reasonable pay. If significant profit remains after paying a salary, an S corp could be more beneficial in terms of tax savings.
Business Structure and Tax Status
An S-corp indicates how a business is taxed, and a single-member LLC cannot be designated as an S-corp. Compared to corporations, LLCs may have fewer reporting requirements and may be easier to manage.
An LLC taxed as an S-corp means the owner’s salary will be a business expense, and the owner will only pay taxes on their salary, not on Social Security or Medicare. The growth potential of your business can influence your decision between forming an LLC or an S corp. Both an LLC and S-Corp can be taxed at the personal income tax level.
Legal Protections and Tax Benefits
A Limited Liability Company (LLC) protects the personal assets of the owner from legal trouble or debt claims, whereas an S corporation is an IRS tax status that can be elected by an LLC for different tax treatment. Most small businesses file taxes as a normal “default” LLC.
Choosing the Right Entity for Your Business
The choice between an S corp and an LLC depends on the specific needs and circumstances of the business owner. Both types of business can deduct expenses before taxes. By default, a single-member LLC is treated as a disregarded entity by the IRS, but can opt to be taxed as a C or S corporation.
LLC and S-Corp Definitions and Formation
The formation of Limited Liability Companies and S-Corps can be relatively similar. Information on choosing the best legal and tax structures for your business should be straightforward and not intimidating. An LLC without S Corp taxation could lead to higher tax bills, while an S-Corp offers tax benefits and a limited liability safety net.
S Corp Versus LLC Decisions
The differences between S Corps and LLCs can be significant for your business. To find out the real difference when it comes to corporation versus LLC, it is important to consider the potential tax savings and legal benefits.
Contact Information
For further assistance or questions, you can contact Sam at [email protected] for help with incorporating your business.