Are you confused by the difference between LLCs and S Corps? This article is for you! We’ll clarify the difference and guide you to the best option.
Before we get to the best tax filing qualification for your small business, let’s define an LLC and an S Corp.
What is an LLC?
LLC is a limited liability company, which is a legal designation. In this business structure, the owner is protected from personal liability regarding business activities. Owners are deemed self-employed and are “members” of the LLC.
An LLC can be owned by a single person or by many. Owners can either be hands-off or actively participate in a business organization. Furthermore, there’s no limit to the number of owners residing anywhere in the world.
What is an S Corp?
LLC is a limited liability company, which is a legal designation. In this business structure, the owner is protected from personal liability regarding business activities. Owners are deemed self-employed and are “members” of the LLC.
An LLC can be owned by a single person or by many. Owners can either be hands-off or actively participate in a business organization. Furthermore, there’s no limit to the number of owners residing anywhere in the world.
What is an S Corp?
An S corporation is a desirable tax classification in business because it protects owners from double taxation. Similar to an LLC, owners can be hands-off; owners of an S corporation may also take a salary as employees. However, there is a limit to the number of owners of an S corporation—no more than 100 owners. Also, all owners must be U.S. citizens.
How are LLCs and S Corps taxed?
LLCs can either be taxed as sole proprietorships or partnerships if they have multiple members. Because an S corporation is a tax classification, an LLC, which is a business entity, can attain S corporation status by meeting certain qualifications.
For LLCs that are not S Corps, the owner(s) must pay a 15.3% self-employment tax on all net profits. The owner can also avoid the self-employment tax by taking a salary for S Corps.
How do I know which is best for my business?
Consider the following questions to help you decide whether your business should stay as an LLC or further classify as an S Corp:
- How many business owners are there?
- Where do you do business? Is it only in the U.S., or do you do business overseas as well?
- Who else has a stake in your company, if any? (This can either be a partnership or a corporation)
- How crucial is personal liability protection for you?
- How hands-on do you wish to be when it comes to business upkeep?
- Do you plan to scale your business?
These questions can help you decide on your business’s best tax filing status. Also, speak to your tax accountant or CPA to determine what is best for you financially now and over time. They are up-to-date on the most recent tax laws, so they can better guide you.
