LLC vs S Corp

This week we will be discussing and de-mystifying the difference between LLCs and S-Corporations.


This is a hot topic for many -- I know a lot of you have heard about the benefits of changing your business into an S Corporation, but some of you might not know all the details.


We're breaking it down to fundamentals so you can make an informed decision for your business!



 

LLCs

Alrighty, so let’s briefly go over Limited Liability Companies. An LLC is a legal structure, which allows one to own and operate a business, viewed as separate from its owners (members).


Business Structures include your:

Sole-proprietorships

Partnerships

Corporations

LLCs

This “separation” is also true of Corporations, another type of entity. However, an LLC’s profits and losses are passed-through its members -- the members report this on their tax returns, and are taxed on the Individual level. Corporations are taxed directly, as if they were another person.


This also protects an LLC member’s assets in the event of a lawsuit or debt -- only the business’ assets can be touched, since the members are viewed as separate in the legal sense.


These details make LLC’s the most popular and flexible choice for entrepreneurs and investors.

 

S-Corps

Now for S-Corps: an S-Corporation is not a business structure -- it’s a tax classification. LLC’s and Corporations can choose to be taxed as a:


Sole-proprietorship (for Single-Member LLCs)

Partnership (for Multiple Member LLCs)

S Corporation

C Corporation (traditional Corporation)


Both an LLC and S-Corp pass-through their profits to the individual member(s), thus the profit is itself not subject to Income Tax -- both entities’ taxes are paid at the Individual level.


For an LLC, you will be taxed on all income made in your business. The IRS assumes that all business profit has been paid to you. At an individual level, members are responsible for:

  • Federal & State Income Taxes

  • Self-Employment Tax -- 15.3%

  • Taxes that are withheld for you in a paycheck with normal employment.


When you choose for your LLC to be taxed as an S-Corporation, you avoid Self-Employment Tax on Distributions paid to the owner(s). But the members DO pay Self-Employment Tax on the Salaries paid to them.


With the structuring of S-Corp, owners must classify themselves as employees of the business -- and pay themselves a reasonable Salary. This income IS subject to Self-Employment tax.


However, outside profit (Distribution) paid to Members is NOT subject to Self-Employment tax.


So -- within reason, because the IRS will not play games -- if you pay yourself a more modest Salary, but a higher Distribution, you can reduce taxation in the scope of an S-Corp.


These benefits make it sound like a no-brainer. That every business should just go and have themselves taxed as an S-Corp. But you shouldn’t go and sign up for this without consideration:


  • Business makes enough profit to pay both distribution/salary.

  • If your Distribution wouldn’t be more than $10k, it may not be worth the effort.

  • If you don’t plan on reinvesting those profits into the business.

  • All surplus profit would be taken away from the company, paid to its members.

  • Then, individually taxed.

  • If you plan to reinvest profit into the company during the same year, stay an LLC

  • Avoids unnecessary Income & Employment taxes --> goes into Expenses


If you plan to reinvest your profits into the business over a period of time (not immediately) you could elect to be taxed as a C-Corporation.



 


Need help with payroll or other individual or business finances?


Schedule a FREE

15-Min Consultation TODAY!



 

14 views0 comments

Recent Posts

See All