Tax Comparisons Between LLC and S-Corp
S-corp owners may pay less tax than LLC owners, provided S-corp owners pay themselves a “reasonable salary.” LLCs can have unlimited members, S-corps limited to 100 shareholders.
S-corps allow owners to avoid these taxes on profits paid as distributions rather than salary.
By default LLCs pay taxes as sole proprietorships, including self-employment tax on all profits. Electing S-corp status means less tax, as owners only pay employment taxes on salary, not distributions. LLCs taxed as corporations can treat shareholder-employees as employees, enjoying corporate employment tax benefits.
Ownership and Formation Considerations
S-corps have up to 100 shareholders who must be US citizens or residents. LLCs are generally cheaper to form than S-corps, but S-corps can offer tax advantages making them more cost-effective.
An LLC is a limited liability company, which protects the owner(s) from personal liability for debts and obligations of the business.
Why is an S-Corp better than a partnership? One benefit of an S corporation is profits can pass through the business to the owners.
Deciding on a Business Structure
The information on business structures and taxes can seem complicated and intimidating. These actually work together to provide legal and tax benefits. Filing taxes is confusing for self-employed and small business owners. Choosing the right structure is important, especially after the Tax Cuts and Jobs Act of 2017 changed rules.
LLC and S corporation business structures differ. Owners of single-member LLCs are like sole proprietors and S-corp owners are shareholders.
Both LLCs and S-corps may be eligible for the qualified business income deduction. LLC and S-Corp Structures for Tax Purposes. They are considered pass-through business entities.
In this section, we’ll compare S Corp vs LLC taxes to help you understand the potential tax implications of each structure.
Potential Tax Implications for LLC’s and S-corps
S Corps offer unique tax advantages compared to other business structures. LLCs and S corporations are often talked about together, but they are not an either-or choice.
An S corporation (S corp) is a tax status under Subchapter S of the IRS tax code that you can elect for your limited liability company (LLC) or corporation.
Who Pays More Taxes, an LLC or S Corp? It depends on how the business is established for tax purposes and how much profit is going to be generated.
Both an LLC and S-Corp can be taxed at the personal income tax level.
LLCs and S corporations are two common ways for small business owners to separate themselves from their businesses.
A corporation by default is taxed as a C corporation which has double taxation, once at the corporate level and again for the personal shareholders.
With an S corp election, this amount can be limited by paying an owner a “reasonable salary” and limiting self-employment taxes.
An LLC taxed as an S corp can be achieved by reading form 2553 instructions and filing an S corp election.