- Taxation: An LLC is a pass-through tax entity (single-members are a little different, see below), which means that the business itself does not pay taxes on its profits. Instead, the profits and losses of the LLC are passed through to the individual owners (called "members"), who report their share of the profits and losses on their personal tax returns. An S-Corporation, on the other hand, is a separate tax entity that is taxed on its profits. However, the tax rate for an S-Corp is usually lower than the tax rate for a regular corporation (also known as a "C-Corp").
- Ownership: An LLC can have any number of members, while an S-Corporation is limited to 100 shareholders.
- Formality: LLCs tend to be less formal than S-Corporations. For example, LLCs may not have formal meetings or keep minutes like S-Corporations do.
- Liability protection: Both LLCs and S-Corporations offer personal liability protection for their owners. This means that the owners are not personally responsible for the debts and obligations of the business.
Single-member LLC Tax Implications
A single-member LLC is a type of limited liability company (LLC) that is owned by a single person. From a tax perspective, a single-member LLC is treated as a sole proprietorship if it is not taxed as a corporation. This means that the profits and losses of the business are passed through to the owner and reported on their personal tax return (Form 1040) through the Schedule C (Form 1040), Profit or Loss from Business.
As the owner of a single-member LLC, you will be responsible for paying self-employment taxes on your net earnings from the business. These taxes consist of Social Security and Medicare taxes and are calculated on Form 1040, Schedule SE, Self-Employment Tax.
It's worth noting that you may be able to elect to be taxed as a corporation by filing Form 8832, Entity Classification Election. This can be a useful option if you want to limit your personal liability or if you expect the business to generate significant profits that would be subject to a higher tax rate as a sole proprietorship.
S-Corporation Tax Implications
An S-Corporation is generally a good choice if you want to lower your self-employment taxes or if you expect the business to generate significant profits that would be subject to a high tax rate as a sole proprietorship or single-member LLC.
One of the main benefits of an S-Corporation is that it allows you to allocate some of your income as salary and some as distributions. The salary is subject to self-employment taxes, but the distributions are not. This can help to reduce your overall tax burden by allowing you to lower the amount of income that is subject to self-employment taxes.
It's worth noting that the IRS has strict rules for determining the appropriate amount of salary for S-Corp owners. In general, the salary should be reasonable and commensurate with the services you perform for the business. If the IRS determines that your salary is too low, it may reclassify some of your distributions as salary, which would make them subject to self-employment taxes.
Another benefit of an S-Corporation is that it can be a good choice if you want to issue stock to employees or raise capital by selling stock to investors. LLCs, on the other hand, do not have the ability to issue stock.
It's important to keep in mind that S-Corporations have more formal requirements than LLCs, such as holding annual meetings and keeping minutes. They also have stricter rules for ownership, as they are limited to 100 shareholders.
In summary, an S-Corporation may be a good choice if you want to lower your self-employment taxes, issue stock, or raise capital. However, it's worth considering all of your options and consulting with a business attorney or tax professional to determine the best choice for your specific situation.
Here is a nice bookkeeping template that offers GAAP compliant logic.
I recommend consulting with a tax professional to determine the best course of action for your specific situation.
Article found in Startups.
