LLC vs. S-Corp: Which is Right for Your Business?
We frequently receive queries about choosing between an LLC and an S-Corp for new businesses. To help you decide, we will outline the benefits of each option and explore a combined approach.
Benefits of an LLC
An LLC offers limited liability protection, which can be useful for shielding your personal assets from potential lawsuits related to your business.
Advantages of an S-Corp
An S-Corp accommodates multiple members and helps limit self-employment taxes compared to a single-member LLC.
Key Points to Consider
An LLC is not an IRS filing status but a state-recognized entity type. We have experience forming LLCs across various states and can assist you with this process. The IRS defaults to a specific tax status based on the LLC’s membership:
- Single-Member LLC: The IRS treats this as a “disregarded entity,” meaning you report its income on Schedule C of your personal tax return (Form 1040). No separate federal business return is required, but state filing requirements may vary.
- Multi-Member LLC: The IRS classifies this as a partnership, necessitating a separate Form 1065 tax return. These returns are due one month before your personal tax return. Late filing penalties can accumulate quickly. Profits or losses flow through to individual tax returns, and some states may impose additional franchise or business taxes.
LLC Taxed as an S-Corp
You can elect for your LLC to be taxed as an S-Corp to reduce self-employment taxes. File Form 2553 with the IRS before March 31 of the relevant year. If you miss this deadline, late-filing options may be available.
Drawbacks of Single-Member LLC Status
- Self-employment taxes can be high depending on your business’s profits.
- Some states require separate annual filings and fees, either fixed or income-based.
- Quarterly estimated taxes may be necessary to avoid penalties.
Drawbacks of S-Corp Status
- You must run payroll and ensure it is reasonable relative to your role in the business.
- This requires separate federal filings, which can be complex and may increase bookkeeping and tax preparation costs.
- Payroll systems need to comply with unemployment insurance, worker’s compensation, and disability insurance requirements.
- Setting up and maintaining a payroll system involves costs. We recommend Gusto for its efficiency in handling multi-state payroll needs.
- Quarterly payroll reports are necessary.
- Quarterly estimated taxes may also be required.
Our Expertise
Our firm excels in setting up LLCs, S-Corps, and partnerships. We handle payroll systems and HR outsourcing, ensuring compliance with state and federal requirements, including necessary insurances and registrations. Contact us to discuss the best option for your business.
Hi, I’m a consultant in NYC earning approximately 100,000 a year and would like to open either an LLC that files as an S-Corp or start an S-Corp. Will I receive all the benefits of an S-Corp if I open an LLC an file as an S-Corp? Meaning, will I be able to pay myself a rate and only have to pay taxes on that money because the rest will be paid as a distribution to the S-Corp (myself)?
HI Megan, there are some detailed mechanics that some non-accounting professionals may find difficult to understand, but I will attempt to outline for you below.
1. Yes, you can choose to create an LLC and then apply for Federal S-Corporate status for the LLC.
2. An application will also have to be submitted to the state
3. Once you are an LLC filing as an S-corp, you will be paying individual taxes both on the portion that you have paid yourself as salary as well as on the portion of any “profit” left over after you pay yourself the salary. Since that is the case, you may wonder “then aren’t I paying tax on the full amount anyway, as my salary plus any after-salary remaining profit will equal my total net revenue to me, anyway?” The answer is that you will not be paying self employment tax on the portion of the net income that is NOT going to you as salary. The amount of the distribution is tax free, but in an s-corp, you get taxed on full net income as an s-corp is a flow through entity.
You should also be aware that NYC has its own corporate tax which is quite high as NYC does not recognize the flow through structure. Since some math is involved in determining your optimal structure, I do recommend you run some scenarios with a qualified professional, such as our firm. I hope this helps