S Corp vs. LLC - Differences and Benefits (2024)

FAQs

S Corp vs. LLC - Differences and Benefits? ›

LLCs can have an unlimited number of members; S corps can have no more than 100 shareholders (owners). Non-U.S. citizens/residents can be members of LLCs; S corps may not have non-U.S. citizens/residents as shareholders. S corporations cannot be owned by corporations, LLCs, partnerships or many trusts.

The Bottom Line: Choosing the Best Option for Your Business

Choosing an S-corp will help you save on your self-employment taxes, just be aware that this will require intense and precise bookkeeping. LLCs are best suited for smaller businesses because of their flexibility, cost and convenience.

Because of the one-class-of-stock restriction, an S corporation cannot allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike partnerships or LLCs taxed as partnerships where the allocation can be set in the partnership agreement or operating agreement.

Qualifying for Specific Tax Breaks

In some circ*mstances, an S corp owning a separate LLC can help the business qualify for certain tax breaks (beyond reducing self-employment taxes).

One major advantage of an S corporation is that it provides owners limited liability protection, regardless of its tax status. Limited liability protection means that the owners' personal assets are shielded from the claims of business creditors—whether the claims arise from contracts or litigation.

Making the move from an LLC to an S corp is a complex decision and depends on multiple business factors. Typical reasons for becoming an S corp include: Self-employment tax savings: A popular reason for becoming an S corp is the savings you can realize on self-employment tax.

The main benefit of incorporating as an S corporation over being self-employed is the tax savings on self-employment taxes (Social Security and Medicare). For each dollar of profit, it could mean as much as 14.13% in savings when it's time to pay taxes.

They are popular largely because organizing as an S corp appeals to small businesses and sole proprietors, offers enticing tax advantages, and provides liability protection for personal property. S corps are considered “pass-through entities“, which means their taxable revenues are not taxed at the federal level.

Generally speaking though, the election to be a "S" Corporation, is at the Federal Level. At the Federal level, there is no requirement for employees, per se.

Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.

Does an S Corp owner have to take a salary? ›

An S Corp owner has to receive what the IRS deems a “reasonable salary” — basically, a paycheck comparable to what other employers would pay for similar services. If there's additional profit in the business, you can take those as distributions, which come with a lower tax bill.

If you think you can benefit from the combined features of using an LLC to own and operate your small business and then having it be taxed like an S corporation, the possibility exists to establish your business as an LLC, but then make the election to have it treated as an S corporation by the IRS for tax purposes.

The corporation can pay you a salary, and withhold taxes on your behalf from that salary. In fact, the corporation is required to do that if it's profitable (you're required to pay yourself a reasonable salary before taking distributions). But the corporation cannot and should not pay your personal obligations.

According to an article published by Online Taxman , which states that “from a tax perspective, it makes sense to convert an LLC into an S-Corp, when the self-employment tax exceeds the tax burden faced by the S-Corp.” In general, you'll want to consider electing S-corp tax status for your LLC if your business is ...

I've heard it ranges from $45,000 to $70,000 in taxable income (your business's, not your own). Personally, I think if your business is making more than $60,000 in profit every year, then you should look into forming an S corp. Keep in mind that we're talking about taxable income, not gross revenue.

In order to qualify for S corporation status, the IRS requires the corporation to be residentially located in the United States, retain fewer than 100 shareholders limited to individuals, trusts, and estates (excluding partnerships, corporations, and nonresident alien shareholders), issue only one class of stock, and ...

A corporation lives forever. It has no expiration date as an entity and from its formation is regarded as existing in perpetuity unless dissolved. An LLC is more dependent on its state law.

S Corporations

As a pass-through entity, an S Corporation doesn't pay taxes on income at the corporate level; instead, it passes through to the business owners.

So, what's the tax benefit of an S Corp? The S Corp advantage is that you only pay FICA payroll tax on your employment wages. The remaining profits from your S Corp are not subject to self-employment tax or FICA payroll taxes. Those profits are only subject to income tax.

When a single-member LLC is taxed as an S Corporation, profits and losses pass through to the owner's personal income tax return. However, there's a difference that may reduce the LLC owner's personal tax liability. As an S Corporation, the LLC must put the owner on its payroll.