First, an LLC is a limited liability company. It is a legal designation. Secondly, this business structure protects the owner from personal liability regarding business activities. The LLC considers the business owners as “members” and they are self-employed. An LLC can have one or more owners who can actively participate in a business organization or be hands-off. Further, an unlimited number of owners can reside anywhere in the world.
What is an S Corp?
An S Corp is a tax classification. It is desirable because it protects business owners from double taxation. Like an LLC, owners can be hands-off; owners of an S Corp may also take a salary as an employee. There is a limit to the number of owners of an S Corp – there can be no more than 100 owners, and all must be United States citizens.
LLCs vs. S Corps taxation?
LLCs are taxed like sole proprietorships or partnerships (if there are multiple members in the LLC). Because an S Corp is a tax classification, an LLC, as a business entity, can attain S Corp status by meeting specific qualifications.
For LLCs, not S Corps, the owner(s) must pay a 15.3 percent self-employment tax on all net profits. The owner can take a salary for S Corps to avoid the self-employment tax.
How many owners are there in your business? Where do you do business (U.S. only or overseas as well)? Who else has a stake in your company (i.e., a partnership or a corporation)? Do you plan to scale your business? How important is personal liability protection to you? How hands-on do you wish to be in terms of business upkeep? Answering these questions will help guide you on the best option for your business’ tax filing status. To determine what is best for you financially now and over time, speak to a qualified tax accountant or CPA. They will be up to date on the most recent tax laws, so they can better guide you.