There are a few things to consider when choosing between an LLC and S-Corp, especially regarding each entity's tax savings.
Each one has its unique benefits and drawbacks.
This article will compare an S-Corp and an LLC and discuss the tax savings you can expect by making the switch. Let's get started!
- LLC Vs. S-Corp Tax Savings
- LLC Overview
- S-Corp Overview
- S-Corp Vs. LLC: Who Wins the Business Battle?
LLC Vs. S-Corp Tax Savings
If you are a business owner, you may wonder if you should choose an LLC or an S-Corp. It is essential to understand the tax savings associated with each type of entity if you want o make the most informed decision.
Both an LLC and an S-Corp are taxed at the personal income tax level. LLCs are most often taxed using individual rates. However, some LLC owners choose to elect taxation as a separate entity with their federal ID number. On the other hand, most S-Corp owners receive a salary from which they pay federal taxes, like Social Security and Medicare.
So which is better? If you are expecting to make a lot of money in your business, an S-Corp may be a better option since you will likely pay less in taxes than you would with an LLC.
Although, if you are starting or your business is not generating a lot of income, an LLC may be more advantageous because there are no income restrictions like there are with an S-Corp.
Regardless of which entity you choose, you must be aware of the federal tax filing deadlines to ensure that you comply with the IRS. Now that we have a better understanding of LLC vs. S-Corp tax savings, let's take a more in-depth look at each to help you decide which is right for your business.
LLC Overview
An LLC is more accessible to establish than a corporation and offers owners a more flexible business structure. It is a business entity that provides limited liability for owners, which means that the owner's assets are protected if the business is sued.
Additionally, it is possible to incorporate your LLC online. The internet can be a quick and easy way to network and get your business out there, making it more straightforward to advertise and promote your products or services.
These are some steps you can take to start an LLC:
- Pick a business name
- Find a registered agent
- File articles of organization
- Choose a business bank account
- Create an LLC operating agreement
- Apply for business licenses and a federal identification number
Ownership
An LLC can have one or more owners, referred to as members. If one person owns an LLC, it is known as a single-member LLC. However, it's called a multi-member LLC when it's owned and operated by multiple people.
If an LLC has more than one owner, it's vital to have an operating agreement that outlines each member's roles and responsibilities, as well as what will happen if a member leaves the company. This agreement will protect not only you but your partners as well.
However, if you don't have a partner or any interest in finding one, then a single-member LLC might be right for you.
Management Structure
An LLC's management structure depends on its number of owners. If there is only one owner, then the LLC is classified as a sole proprietorship. This type of business is easy to form and doesn't require any special paperwork to start.
On the other hand, if there are multiple owners, the LLC is classified as a partnership. In this case, each partner will share in the profits and losses of the business. They also have a say in how the company runs.
LLC Taxes
An LLC's tax benefits are in the form of pass-through taxation, which means that the profits and losses of the company pass through to the individual owners, who report them on their tax returns.
It also prevents a business's profits from being taxed twice, once at the corporate and personal levels.
LLC Pros
There are many benefits of owning an LLC, including the following:
- Pass-through taxation
- No income restrictions
- Limited liability protection
- No special filing requirements
- Ability to write off business expenses
LLC Cons
There are also some disadvantages of owning an LLC, such as:
- Annual fees
- It can be expensive to start
- Filing annual reports are required
- Can only be invested by banks
S-Corp Overview
An S-Corp is a specific type of corporation, meaning the business and the owner are considered the same for tax purposes. Profits and losses of the company are passed through to the owner and reported on the owner's tax return.
Ownership
The IRS restricts the ownership of an S-Corp. The business must not exceed 100 shareholders and is limited to one class of stock if a company wants to become eligible for an S-Corp. Additionally, all shareholders must be u.s. citizens or legal residents.
Management Structure
An S-Corp is a management structure where the company is divided into two classes of shares: voting and non-voting. The President, CEO, or other manager is elected by the shareholders and has authority over the company's day-to-day operations. However, the shareholders must approve significant decisions about the company, such as selling it or issuing new debt.
S Corp Taxes
An S-Corp is a corporation that elects to be taxed as a pass-through entity. The company's profits and losses also pass through to the individual shareholders, who then report them on their tax returns.
S Corp Pros
Here are some of the advantages of S-Corps:
- Personal liability protection
- Employees can receive dividends
- Doesn't have to pay corporate-level taxes
- Employees are eligible to become shareholders
S Corp Cons
These are some of the drawbacks of owning an S-Corp:
- Annual fees
- Restricted by the IRS
- More labor intensive than LLCs
- Owner shares control of the business
- Has guidelines they are required to follow
S-Corp Vs. LLC: Who Wins the Business Battle?
So, who wins the business battle? S-Corp or LLC? It depends on your business goals, needs, and preferences.
An LLC might be the right choice if you're looking for a simple business structure with fewer restrictions. However, an S-Corp might be the better choice if you're looking for a business structure that offers more tax benefits.
Additionally, some U.S. states might put restrictions on S-Corps that don't apply to LLCs. In contrast, there are a few states that are the best to form an LLC. So, it's important to check your state's requirements before making a final decision.
Ultimately, it's up to you to decide what's best for your business. No matter what business structure you choose, consult with a tax advisor or accountant to ensure you're making the best decision for your business.
Closing Out
If you're considering forming an LLC or switching to an S-Corp, it's important to know the difference between and weigh the tax savings associated with each. Contact your accountant to discuss your options before making a final decision.
Do you own and operate an LLC? Have you ever wanted to start an S-Corp? Do you have any questions about either entity? Let us know in the comments below!
