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.
Ownership and Tax Structure
S corps have shareholder limits and ownership requirements that LLCs do not. However, LLCs provide more flexibility in allocation of profits and losses. Both entity types have pass-through taxation.
The number of LLC members affects taxation options. Single-member LLCs default to sole proprietorships unless owners choose otherwise. Multi-member LLCs default to partnerships but can elect S corp status.
Taxation on Income
S corp owners only pay self-employment taxes on salaries. LLC owners pay these taxes on all income. Thus, S corps offer self-employment tax savings.
In summary, S corps can provide more tax savings but LLCs allow more flexibility in structure. Entrepreneurs should weigh options carefully when choosing business entities.
Why would anyone choose LLC over S corp?
LLCs can have an unlimited number of members, while S-corps are limited to 100 shareholders. One of the benefits of an S corporation is that profits can pass through the business to the owners. When it comes to choosing between an LLC and S Corporation, it’s critical to know the differences between the two.
Comparing Tax Bills
Who Pays More Taxes, an LLC or S Corp?
LLCs are often taxed using personal rates, but some LLC owners choose to be taxed as a separate entity with its own federal ID number. S corporation owners must be paid a salary in which they pay Social Security and Medicare taxes.
S-corp owners may pay less on this tax, provided they pay themselves a “reasonable salary.”
Typically, an LLC taxed as a sole proprietorship pays more taxes and S Corp tax status means paying less in taxes. If you form an LLC without electing S Corp taxation, you could have a higher tax bill. An LLC is a legal entity only and must choose how to be taxed.
Deciding the Right Fit for You
Which One is Right for Me?
To find out which entity is the best for you, you must first decide what a reasonable salary would be for a person in your position.