Key Differences
So the main difference is with a single-member LLC, only the business owner can report business profit/loss on their personal taxes, whereas in an S-Corp, all shareholders can.
An S-corp indicates how a business is taxed—it is not a business structure, contrary to an LLC designation.
While it may depend on your specific circumstances, in general, a default LLC tax structure is better than an S corp for holding rental properties, as rental income is typically considered passive income, which is not subject to self-employment tax.
Compared to corporations, LLCs may have fewer reporting requirements and therefore be easier to manage.
Tax Considerations and Ownership
The main differences between an S corp and LLC include:
- S corporations are required to pay a salary to those owners who work for the company and own more than 2% of the company.
- In contrast, LLCs are not obligated to pay a salary to its members (owners).
S corp stock can be freely transferred, while LLCs usually require approval from other members to transfer ownership stakes.
Pros of establishing a single-member LLC include:
- The ability to avoid double taxation.
- Easy setup, typically involving only a one-page form.
An LLC is a pass-through entity. Therefore, the profits or income is taxed at the owner’s personal rate and not at the corporate level.
LLCs allow for personal liability protection, which means creditors cannot go after the owner’s personal assets.
Electing S Corp Status
To become an S Corp, your business must first register as a C corporation or LLC and then elect S Corp status using Form 2553.
LLC Advantages
An LLC is a limited liability company, offering protection to the owner(s) from personal liability for debts and other obligations of the business.
LLCs are common because they provide liability protection similar to a corporation, but they are easier to establish, with fewer regulatory requirements than other types of corporations.
Decision Making for Entrepreneurs
When starting a small business, many entrepreneurs end up deciding between two types of business entities—LLC vs. S corporations.
The growth potential of your business can influence your decision between forming an LLC or an S corp. While LLCs provide flexibility in management and pass-through taxation, they may face limitations in raising capital due to their inability to issue stock.
LLC and S Corp Definitions. By default, a single-member LLC (SMLLC) is treated as a disregarded entity by the IRS, while an S corp is an IRS tax status that can be elected by either an LLC or a corporation.
Choosing Between S Corp and LLC
Choosing between an S corp and an LLC depends on the specific needs and circumstances of the business owner. An S corp is generally more tax efficient, while an LLC provides greater flexibility in management and profit distribution.
Can an LLC own an S corp? An LLC can act as an investor in a corporation just like an individual would, but S corporations can only be owned by actual individuals.
Even though an S corp cannot be owned by an LLC, an S corp can own an LLC. Shareholders cannot be any business entities (LLCs, corporations, etc.).
In Summary
Knowing the best legal and tax structures for your business, the difference between S Corps and LLCs, and identifying the benefits of each is essential for any entrepreneur.
Forming an LLC without becoming an S Corp could mean missing out on serious tax savings.
The two options are very similar, yet their key differences can be crucial for your business.
For more information or assistance, you can reach out at [email protected].