Should Your Business Be an LLC or an S Corp? Are you confused about whether to incorporate your business as a limited liability corporation or an S corporation? On the other hand, You are not alone as this is one of the issues that entrepreneurs face. But, whatever you are reasoning, we will be taking you through the world of the LLC and the S corporation. This will help you decide what’s best for you.
Now, these two organizational structures have similarities and differences which can make choosing between them and others, as a C corporation an arduous task. With each state also varying and having different rules when it comes to these corporations, it is expedient to get help from a more experienced accountant or attorney to help you make a decision of what’s best for you.
Now both the LLCs and S corps can also deduct pre-tax expenses, like travel, uniforms, computers, phone bills, advertising, promotion, gifts, car expenses, as well as health care premiums, according to McFarland.
Be it as it may, both structures have their advantages and disadvantages which makes them unique in their own way to business needs. Our next point will help you get the merit of both structures. Now let’s dig further, and analyze the advantages and disadvantages of both an LLC and S Corp.
Limited Liability Company
Organizing your business as an LLC allows you to protect your personal assets from the creditors of your business. When you make your business an LLC, it means you can’t be financially responsible for more than your investment in the company.
An LLC can be seen as a “pass-through entity”, which implies that all the income and expenses from the business get reported on the LLC operator’s personal income tax return.
Limited Liability Company Advantages
- An LLC is quite affordable to start, the cost is inexpensive, and may just involve a couple of hundred dollars.
- The owner of a single-member LLC does not have to file a tax return for the LLC, because they only report the activity on their personal tax return.
- With an LLC, you have ease of setup since most LLC forms are only a single page for single-member LLCs.
Disadvantages of a Limited Liability Company
- Owners of LLCs are to ensure that they operate the LLC separately from their personal affairs.
- Single-member LLC owners are required to pay self-employment tax on income generated in the LLC, which implies making quarterly estimated payments to the IRS.
Building an S corp, helps you safeguard your personal assets from the creditors of your business. S Corp, helps you avoid paying both personal and corporate taxes. Although the difference is that in an S corp, owners pay themselves salaries and additionally get dividends from any additional profits the corporation may earn.
Advantages of S Corporations
When it comes to S corps, the most outstanding advantage is that it offers tax benefits when it comes to excess profits, which is known as distributions. Since the S corps pays it’s employees a “reasonable” salary, this means it should be tied to industry norms, while also deducting payroll expenses like federal taxes and FICA. Thereafter, any remaining profits from the company can be distributed to the owners as dividends, which gets taxed at a lower rate than income.
Disadvantages of S Corporations
- It is quite expensive to form an S corps.
- S corporations operate under more strict guidelines than LLCs.
- Shareholders are to pay attention to paying themselves a “reasonable” salary for the work they carry out for the S corp since the IRS is increasingly on the S crops for this reason.
- There may be additional state taxes for S crops
- Passive income limitation, whereby you can’t have more than 25% of gross receipts from passive activities like real estate investment.
- Shareholders are to adhere strictly to the requirements at all times because if they don’t, they risk disallowing the S corp election, and the corporation may end up being treated as a C corp with its corresponding restrictions.
Why a Limited Liability Company may be Best for your Business
The LLC might be your best choice if you are a new business owner or operate an internet business since it takes far less to set up and organize according to Eka.
Another angle to LLC is that you can elect to be taxed as an S corp while still retaining the structure of an LLC.
Why an S Corporations might be the Best Option for Your Business
If your business is fast-growing businesses that plan to bring on investors or share the ownership of the company with employees, you may need to consider making the switch to an S corp. Hope this point helped. Thanks for your time.