LLC versus S Corp Tax Benefits: Everything You Need to Know
When it comes to LLC versus s corp tax benefits, you can combine the two entities as an LLC with an S corp tax structure.3 min read
2. Management Structure
3. Tax Returns
When it comes to LLC versus s corp tax benefits, you can combine the two entities as an LLC with an S corp tax structure. There are pros and cons to LLCs and S corps, depending on your business goals, but an LLC is easier to set up than a corporation. An LLC occurs when owners come together and form a business entity that affords them certain protections from business liabilities and debts. S corps and LLCs separate business entities from business owners, allowing all members to conduct business with liability protection.
Additionally, S corps and LLCs offer what’s known as pass-through taxation, where profits and losses flow from the LLC to individual members to file on their tax returns. From there, S corp members would file a business tax return, but LLCs would only need to file a business tax return if it has over one owner. Otherwise, LLC pass-through taxation allows members to file profit and losses on their tax returns on an individual basis. LLCs and S corps also do not pay business income taxes.
LLC vs. S Corps Pros and Cons
When considering LLCs, keep in mind the following:
- LLCs are permitted an unlimited amount of members
- Non-U.S. citizens can be part of LLCs
- LLCs are permitted subsidiaries with no restrictions
- LLCs may be owned by other LLCs, partnerships, trusts, S corps, and C corps
On the other hand, S corps come with certain limitations:
- S corps cannot have over 100 shareholders (or owners)
- S corps cannot accept non-U.S. citizens or residents as owners
- Other business entities cannot own an S corp
LLCs guidelines mostly come in the form of recommendations instead of mandates. Such recommendations include:
- Drafting an Operating Agreement
- Member Issuance
- Holding and Recording Annual Meetings among Members or Managers
- Documentation major internal management decisions
S corps are primarily governed by mandates and must adhere to the following rules:
- Adopt Bylaws
- Stock Issuance
- Conduct Annual Shareholder and Director Meetings
- Record Meeting Minutes and Keep Records
LLCs owners can have members in the form of owners, or they can have managers operate the business. Under a member-managed LLC, it is run in the same manner as a partnership. If it is manager-managed, the LLC closely aligns with a corporation, where the members will not be involved in daily business operations.
Under an S corp, the organization is run by officers and directors. The board of directors oversee all business affairs and make important decisions on the company’s behalf, but they are generally not involved in daily management. Rather, the board elects officers to manage everyday aspects of the corporation.
Unforeseen events such as a withdrawal or member death may cause the dissolution of the LLC. Further, certain states mandate a dissolution date when you file your formation documents.
On the other hand, an S corp exists in perpetuity. When considering membership interest for LLCs, it is usually non-transferrable, and other members must approve of the transaction. S corps members can transfer stock freely, so long as it meets IRS restrictions.
An LLC member’s personal tax return depends on the percentage ownership in the business. For instance, a 50 percent LLC owner that nets $120,000 pays 50 percent tax on that profit, which equates to $60,000 on a tax return.
The owner does not pay disability or state unemployment taxes, saving them on the cost of payroll taxes overall. With that, owners cannot access such programs because they have not paid into the system. LLCs also pay tax on any net profits in quarterly installments to the IRS, and LLC owners must pay self-employment taxes.
S corps tend to have more favorable self-employment taxes than LLCs because the owners can be designated as employees who are paid a salary, and FICA taxes are paid and withheld on that basis. Earnings on corporations after salaries are paid can be labeled as unearned income that’s not open to self-employment taxation. An S corporation generally pays more tax than an LLC due to the additional payroll taxes and state corporate taxes that are applicable.
To learn more about LLC versus S corp tax benefits, post your legal need to our UpCounsel marketplace. UpCounsel’s lawyers have the experience and savvy in helping you find the best tax structure for your LLC, and whether a corporation or LLC is right for your business endeavors. Further, UpCounsel lawyers will lay out the tax advantages you can use to save you additional money.