LLC vs S Corp: differences between S corp and LLC

A complete comparison of LLC vs S Corp differences, tax benefits, similarities; as well as the advantages and disadvantages of LLC and S Corp.

An LLC may be used in many countries and under different names. It is not a corporation in the sense of being a separate legal entity; rather, it is often considered an unincorporated association.

It can be taxed like an S Corporation or as a pass-through entity. An LLC also affords the owners protection from personal liability. It’s similar to a sole-proprietorship, but with additional tax benefits. It’s important to note that any income an LLC earns or losses passes through to the members of the LLC for tax purposes regardless of whether they were involved in the business transaction or not.

What is S corp?

“S Corp” is a name for a separate, legal corporation that elects to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. This means that the corporation does not pay corporate income taxes. Instead, the income, deductions, and credit are passed through to individual shareholders of the company and then taxed at their individual tax rates.

An S-Corp has been designated as a “small business corporation” according to section 1244 of the U.S. Internal Revenue Code (IRC). Many states also have statutes that allow certain corporations that meet their definition of “small business” to be treated as S Corps under state law as well.

An S Corp can have no more than 100 shareholders, all of whom must be U.S. citizens or residents and who cannot be partnerships, corporations, non-resident aliens, trusts, or estates (with some exceptions for tax-exempt organizations). An S Corp shareholder can also not be another corporation.

To qualify for the S Corp status, the business must be a domestic corporation.

S Corporations and LLCs offer liability protection, but an S Corporation limits the number of shareholders it has to 100.

LLC vs S corp for small business

LLCs and S corporations are similar business structures. In fact, an LLC is actually a type of corporation that was developed as a way for small businesses to enjoy the limited liability protections that corporations receive from state laws but also have the tax benefits of a partnership or sole proprietorship, which are treated as pass-through entities by the Internal Revenue Service (IRS).

Cost of llc vs s corp

The main disadvantage of forming an S corporation is that there are several requirements that must be met in order to take advantage of the tax benefits. For example, for your company’s first year you will need to plan ahead and file a form with the IRS (Form 2553) and then wait 90 days before filing your first tax return (Form 1120S). You cannot begin operations until you have filed the form, which can be frustrating if you are short on cash or need to raise more capital.

LLC vs S Corp Taxes

Unlike an S-corp, all kinds of income are taxed on the personal level in an LLC, instead of at the business level. This is because LLC management chooses to be taxed in this way. However, if they choose otherwise, they can get taxed like a C-corp or S-corp depending on their capital structure and how many owners there are.

Who pays more taxes LLC or S-Corp?

Typically, a limited liability company (LLC) does not pay taxes as a corporation would. Instead, the members of the LLC are responsible for paying self-employment tax, which is the Social Security and Medicare taxes. However, the members of an LLC can elect to be taxed like a corporation.

A Sub-chapter S Corp or S-Corp is a corporation that has elected to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. The shareholders of the S Corp report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual tax rates.

The pro of an LLC is that it is not taxed as a traditional corporation which leads to savings each year by way of lower annual fees and less paperwork. However, members of an LLC must pay self-employment taxes.

The con of an S Corp is that it is taxed as a traditional corporation and that it is more expensive and time-consuming to set up.

The election of an LLC to be taxed like an S-Corp can be beneficial for small business owners unfortunately, the election is not automatic. And it must be properly filed with the IRS and the states in which the LLC operates.

LLC vs S corp taxation

The tax treatment of S Corps is that there is no corporate-level taxation on items of income or loss passed through to shareholders. There are limitations on how much losses can pass-through in a given year. A shareholder attaches their basis in the stock of the S Corp to items of income or loss as they occur and as such, the income is taxed as if it had been earned by the shareholder directly.

LLC vs S corp tax implications

LLCs can be taxed like corporations (taxed once at the corporate level and then taxes, dividends, or other distributions to shareholders are taxed again on individual returns) or they can be taxed only once when income is recognized by the members. Taxes can be delayed until the distribution of profit to members, or paid in advance in the form of payroll taxes.

Tax filing llc vs s corp

An eligible corporation can request special tax treatment from the IRS by filing its intention to become an S Corporation with the appropriate Service Center. Once the election has been authorized, the entity will be taxed as an S Corporation unless it chooses to alter.

Tax rate llc vs s corp

Each owner’s personal income tax rate is applied to their share of LLC net income. The corporate tax rate applied to S-Corp net income then flow-through distributed/allocated as part of shareholders’ personal returns.

LLC vs S corp tax benefits

  1. Both have pass through taxation, similar to a partnership.
  2. No double taxation on LLCs owned by members.
  3. LLCs can merge with other companies without concerns over changing tax status.
  4. LLC members are not required of estimated taxes.

Other benefits of llc vs s corp

S Corp Advantages

An “S Corp” designation allows an eligible corporation to avoid double taxation on profits distributed to shareholders by instead allocating the income passed through directly to the individual shareholders who earn it and then taxing them for this allocation at their personal tax rates. The key benefits of S Corp status are that earnings are not subject to self-employment tax and such earnings flow through to the individual shareholder and do not need to be distributed by the corporation.

One advantage of forming an S corporation is that your business will not need additional financial or management expertise because it has been done before by thousands of other companies. S corporations are a very well-tested business structure and there is a lot of information available about how they should be managed. In addition, most professionals who specialize in taxation or corporate law will have experience with S corporations and this expertise would not transfer over to LLCs which are still fairly new.

LLC advantages

An LLC is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

One advantage of forming an LLC is that you can choose to be taxed as an S corporation, C corporation, or even a partnership without changing the LLC’s legal structure. This allows you to change your tax status if your business’s circumstances change. For example, some businesses including software startups start out as LLCs and later elect to be taxed as C corporations when they raise capital from investors because venture capitalists generally prefer investing in C corporations. Furthermore, LLCs are not subject to the same complex rules that limit certain fringe benefits for S corporation owners.

Legal protection llc vs s corp

LLCs and S corporations both offer limited liability protection to their members, which shields them from personal liability for business debts and claims. For example, if someone slips and falls on the store premises of an S corporation, he or she cannot sue the individual members of the company.

Shareholders/owners of an LLC are not personally liable for debts and obligations of the company, as they would be if they were shareholders in a corporation.

Differences between S Corp and LLC

Unlike an S-corp, all kinds of income are taxed on the personal level in an LLC, instead of at the business level. This is because LLC management chooses to be taxed in this way. However, if they choose otherwise, they can get taxed like a C-corp or S-corp depending on their capital structure and how many kinds of owners there are.

Income passes through the business to each owner regardless of whether he/she was involved in generating it. When people receive distributions from an LLC that was not involved with earning them, these kinds of distributions may be considered passive activity gains for tax purposes which must also be reported on schedule E along with other kinds of income that pass through personal earnings.

Additionally, if some kinds of income are earned within an LLC, it can also be subject to double taxation when the money is distributed. This occurs when there’s a mismatch between stocks in an S-corp and income sources inside the business. For example, if ordinary stock income is earned by the business but only preferred stock is owned by one or more shareholders, then this will cause double taxation issues because each share of preferred stock already receives its own rights.

Self employment tax llc vs s corp

When an S-Corp chooses “taxable” treatment, you pay self-employment taxes on all profits; owners still pay personal income taxes on money distributed as dividends from the company. This only applies if you elect “taxable” treatment for your s-corp.

This is because an S-Corp is taxed like a corporation, therefore, in addition to the corporate tax rate, an S-Corp must pay a 1 or 2% self-employment tax on any amount over $400 distributed to shareholders as dividends. The self-employment tax does not apply to LLC owners.

Because of the 1 or 2% self-employment tax, an S-Corp owner must contribute significantly more to their individual retirement account (IRA) than a sole proprietor or partner.

Single member LLC vs S corp taxes

When comparing single-owner LLC vs S corp, the main benefit of forming your business as an LLC is the potential pass-through tax treatment, which allows all profits and losses to be reported on your personal taxes, avoiding double taxation. However, this benefit is limited to single-member LLCs only since the IRS requires all multiple-member LLCs to be taxed as corporations regardless of what business structure they elect.

For example, if you are a co-founder in an early-stage startup trying to get your business off the ground and you do not have any tax rates that vary with your income, then there is little point in having the company be taxed as an S corporation rather than an LLC. You can choose which tax treatment works best based on your business’s circumstances whenever you begin filing taxes for your LLC (which you will do as a separate legal entity).

Is it better to be a single member LLC or S-Corp?

The S-Corp structure is ideal for businesses that plan to grow. You may want to consider dissolving your LLC or closing it down after you become a one-person company.

The LLC is the best choice for a sole proprietorship or small business that wants to avoid double taxation and maintain complete control over operations.

The IRS states that a business should be taxed as a corporation if it has several owners, but filing as an LLC offers many advantages. The LLC structure is very flexible. You can run the company yourself or hire employees. The profits and losses remain with you as a business owner.

An S-Corp is a structure with a little more paperwork. You must file a separate federal tax return for the business and pay yourself a salary. You can then take the remaining profits home as a dividend.

Multi member llc vs s corp

Let’s explore some of the key differences between multi member LLC vs S Corp. Some of these include taxation, management structure, liability protection, and operational flexibility. These are all important areas to address when considering which type of business entity is best suited for your individual business needs.

Tax advantage llc vs s corp

A key difference between LLCs and S corporations revolves around the taxation structure. The IRS views an LLC as a pass-through entity for tax purposes, which means that profits are passed through to the members of the LLC and taxed at their individual tax rates. However, S corporations have a two-tier tax structure, which means they are subject to both corporate taxation and individual taxation. As a result, LLCs typically have more flexibility in terms of managing the flow of money through the organization.

Management Structure

A manager(s) is appointed for an S corporation while members are responsible for setting up LLCs. This matters because LLCs offer greater management flexibility while S corporations require at least one corporate officer. LLCs are not required to have any managers, while S corporations must have at least one corporate officer (president, vice president, etc.). Corporate officers are typically responsible for managing the flow of cash within an S corporation.

Operational Flexibility

LLCs and S corporations both have some degree of operational flexibility. For instance, neither type of business is required to have annual board meetings or keep extensive records about the company’s operations. However, LLCs are generally more flexible when it comes to matters such as distributions, capital changes, or dissolutions.

Choosing between an LLC vs S Corp can be confusing.
Choosing between an LLC vs S Corp can be confusing

Which is better S-Corp or LLC?

The IRS states that a business should be taxed as a corporation if it has several owners, but filing as an LLC offers many advantages. The LLC structure is very flexible. You can run the company yourself or hire employees. The profits and losses remain with you as a business owner.

An S-Corp is a structure with a little more paperwork. You must file a separate federal tax return for the business and pay yourself a salary. You can then take the remaining profits home as a dividend.

Should I make my LLC an S-Corp?

If you’re an LLC owner that doesn’t pay himself a reasonable salary, or if all of your members are U.S. citizens or permanent residents, then converting your LLC to an S-Corp may be a great idea. However, if your members are non-U.S. citizens, or if you’re considering paying yourself a hefty salary (which could cause some double taxation), then converting your LLC to an S-Corp may not make sense.

Many people wonder whether it might make sense to convert an LLC into an S-Corp (or vice versa).

The biggest advantage to converting an LLC into an S-Corp is that S-Corp status has some tax advantages that LLCs don’t have. The main reason is, an S-Corp is not taxed on the income earned directly by the business, only on the income earned by the shareholders. This can make a big difference if your LLC has two or more members because in that case, the IRS will tax your LLC as a “pass-through,” which means all of the income and expenses from the business get reported on the individual tax returns of each member.

Converting an LLC to an S-Corp involves filing IRS Form 2553, which the IRS typically acknowledges in about 2-3 months. The process is relatively inexpensive.

The main disadvantage to converting an LLC to an S-Corp is that, as I mentioned above, all of the income and expenses from the business get reported on the individual tax returns of each member. This means that each member’s personal income tax rate will likely be applied to the LLC’s profits, which could potentially cause double taxation. The other big disadvantage to an S-Corp is that all shareholders must be U.S. citizens or permanent residents (green cardholders).

Advantages and Disadvantages of LLC vs S corp

Advantages of S corp over LLC

  1. An S-Corp is taxed like a corporation and not like a sole proprietorship or partnership, which places the burden of self-employment taxes on the owners.
  2. For reasons beyond the scope of this guide, an LLC is not able to use the simpler “check-the-box” form for taxation, even though an LLC can be taxed as a corporation if it so chooses.
  3. Because the shareholders of the corporation are employees, they can receive more generous health insurance benefits than those who work as a sole proprietor or a partner.
  4. An S-Corp can have shareholders who are corporations, which may be beneficial if you want to involve many investors.
  5. Shareholders in an S-Corp do not have to be U.S. citizens.
  6. If you would like to create a holding company and own another company, an S-Corp is ideal because it is easy to establish sub-corporations within it.
A video on the differences between LLC vs S corp, tax benefits, which is better for you to choose.

Advantages of LLC over S corp

  1. The ability to choose who will be the owner and what percentage of ownership each member has.
  2. The ability to make tax elections on Form 8832 (c-election) and make changes to the LLC’s tax election without having to obtain shareholder approval. This can be beneficial when Congress passes a law that changes the tax rates.
  3. An LLC can have an unlimited number of members, while an S-Corp is limited to 100 shareholders under most state laws (some states allow more).
  4. The ability to distribute profits as you wish; an S-Corp must declare dividends to shareholders on par with their percentage of ownership.
  5. There are no restrictions on who may be a member in an LLC; your family members, other businesses you own, unrelated businesses, other companies and even other LLCs can all be members of your LLC.
  6. An LLC can choose who will be considered a member for purposes of collecting taxes, but an S-Corp is required to treat all shareholders equally (for tax purposes).
  7. An LLC can make contributions of appreciated assets to a member’s IRA; this is not possible with an S-Corp.
  8. An LLC is not required to pay fringe benefits to members, but an S-Corp must pay “reasonable” compensation to its owner/employees for services rendered or capital invested.
  9. For certain purposes, an S-Corp is required to file a separate tax return from its owners. In contrast, an LLC does not need to file a separate tax return from its owners unless the business has elected to be taxed as a corporation or partnership.
  10. An LLC can allow for different classes of ownership interests; an S-Corp has only one class of stock.
  11. An LLC can use “check the box” to elect how it would like to be treated for tax purposes (S-Corp, C-Corp, partnership or disregarded entity); however, because an S-Corp must be a corporation and has only one option for tax treatment, it cannot “check the box.”

Disadvantages of LLC

For your business to be eligible for pass-through taxation you must follow the IRS’s rules regarding capital contributions and distributions, which determine how much of a member’s pro-rata share of income is attributed to that member. If a member fails to pay their pro-rata share of expenses, the LLC will have to take money from the capital account for that member, which can result in double taxation.

There is also a risk that a particular member might withdraw all of the funds in the company’s capital account if they are not closely monitored. An S corporation avoids this problem because all money that is contributed to the capital account will also be distributed, which allows an LLC to more easily track and limit a member’s access to company funds.

Should I pay myself a salary from my LLC?

Most entrepreneurs who take the pass-through route pay themselves a salary from their LLC. This is usually the simplest form of taxation for any business.
After all, the owner doesn’t have to pay self-employment tax and they can deduct a portion of their salary as a business expense.

However, just because it is generally simplest doesn’t mean it is always best.
Especially if you are looking to grow this business over time, there may be some other options worth considering.

For instance, should you choose to pay yourself using a dividend instead of taking a salary, you don’t have to pay the same tax rate as you would on a salary. Instead, by paying yourself with a dividend, you only need to pay the 15% tax rate for qualified dividends and long-term capital gains.

That being said, you are required to have the funds to cover the dividend, so you’ll need to take this into consideration.

Disadvantages of S Corp

A disadvantage of an S corporation is that your business will generally have double taxation unless it does one of two things: distribute all of its profits as a dividend or retain enough earnings so that it does not pay out any money to owners. In order to avoid the latter, an S corporation may need to adopt a reasonable salary for its owner(s), even if they do not intend to take that money into their own hands, which can limit how much of the business’s profits are distributed back into the company.

Another con of an S corp is the internal operating rules; there are substantial restrictions on who can be a shareholder. For example, the IRS prohibits certain types of businesses from being shareholders in an S-Corp.

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