Differences Between LLCs and S Corps
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. LLCs pay taxes on all profits unless taxed differently.
Benefits of LLCs and S Corps
S corps have shareholder limits and ownership requirements that LLCs do not. However, LLCs provide more flexibility in allocation of profits and losses.
Tax Implications of Converting from LLC to S Corp
From a tax perspective, it makes sense to convert an LLC into an S-Corp when the self-employment tax exceeds the tax burden faced by the S-Corp. In general, with around $40,000 net income you should consider converting to S-Corp.
- The salary amount is a crucial factor.
- Typically, a self-employed individual should consider an S Corp when they hit around $60,000 – $70,000 in earnings.
- The decision to convert to an S Corp should only be made when your business profits exceed the amount you’d sensibly pay yourself in salaries.
Tax Savings with S Corps
One primary reason to switch to an S Corp is the resulting tax savings on self-employment tax. S corps can pay their owners a reasonable salary and only be subject to payroll taxes on that amount. Distributions above that amount may not be subject to self-employment taxes.