Maybe you haven’t officially declared yourself a business yet and are currently deciding whether to file as an S-Corp or an LLC. Or, maybe, you are already one but are looking to make a switch. Before you make this decision, you must understand the advantages of both sides to make a final decision based on what would benefit you and any potential partners the most.
An LLC, a limited liability corporation, is essentially a partnership with multiple members who all hold some form of membership interest. This membership interest usually translates into shares of the LLC’s profits. An LLC provides offers great flexibility while also protects your assets. Some key benefits of an LLC include:
• Passthrough Taxes – LLC owners don’t have to file a separate corporate tax return. You only have to include their share of profits and losses in their individual tax returns.
• Legal Protection – If something happens to the LLC such as the LLC getting sued, your personal assets are protected.
• Business Expense Coverage – As long as you can reasonably classify an expense as business-related, you can write it off as a business expense, decreasing your overall net income and, ultimately, your resulting tax liability.
S-Corporations also provide many benefits to a taxpayer. S-corps have shareholders instead of members as in an LLC. Many LLCs decide to switch over to an S-Corp because of the distinct advantages it provides. For instance:
• Avoiding Double Taxation – S-Corps are not taxed at the corporate levels, any business profits and losses pass through to the shareholders’ income tax.
• Asset Protection – Similar to an LLC, S-Corps provide personal asset protection by creating a distinction between you and the business.
• Salary and Dividend Payments – S-corp shareholders are employees of the company and receive reasonable salaries from said company. This helps reduce the overall tax bill as the company gets to write off part of the payroll tax amount, and decrease the net income, and resulting tax liability.
LLC’s have may have an unlimited number of members while S-Corps are restricted to 100 shareholders or less. In terms of starting, an LLC is much simpler and easier to manage. The biggest advantage S-Corps have over LLCs are in the self-employment taxes. This means that FICA taxes are taken out and paid onto the salary which makes all corporate earnings after salary are unearned income and left untouched by taxes.
Most LLCs choose to switch over to S-Corp after they have raised a reasonable amount of profit. Foster Financial CPA can assist you in your switch and help you reap the most tax benefits possible.