Should My LLC Be an S Corp? Understanding Business Structures and Taxation

Choosing the Right Entity for Your Business

When choosing a business entity, the founder first chooses between a sole proprietorship, LLC or Corporation. The second choice is taxation. An LLC offers protection from personal liability for debts and obligations that a business might incur. In other words, personal assets cannot be used for legal claims against the business. LLCs allow for liability protection, so creditors cannot go after personal assets.

The LLC is best for a simple business. An S corporation saves money on taxes. A C corporation keeps profits in the business. Being an S corporation can provide an LLC tax savings if it operates an active business and payroll taxes on the owner are high.

An LLC taxed as S corp offers corporation benefits while providing flexibility on income. Potential S corporation disadvantages include formation and ongoing expenses and tax obligations.

Tax Considerations and Conversion to S Corp

You have a decision: should you start an LLC or an S Corp? Both provide legal and financial benefits. Depending on income, the right choice could save thousands per year on taxes. LLCs can elect S Corp status once profitable. This allows profits to pass to shareholders without hefty taxation. Another rule is paying yourself and members at market rate.

When to Convert from LLC to S Corp?

In general, with around $40,000 net income, you should consider converting to S-Corp. Depending on your circumstances the breakeven point could even be as low as $25,000 net income. The conversion must be done by March 15 for the following year, or within 75 days of opening the LLC for the year of opening.

Converting LLC to S Corp can be tricky. Our legal team discusses the key differences between LLCs and S-corps to help you determine how best to structure your business.

Many US entrepreneurs set up an LLC in the beginning, because it is relatively easy and affordable, providing liability protection and other advantages.

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Business Entity Overviews

LLC stands for limited liability company, offering personal liability protection for business debts and liabilities. An LLC can be a single-member or a multi-member LLC.

An S corp is treated like an LLC for legal purposes but with a different tax structure. Employers in an S corp are paid a salary and incur payroll taxes on those wages.

To convert an LLC to an S corp, submit Form 2553 to the IRS. Understanding the differences between an LLC and an S Corp is crucial before making this decision.

Reverting an S corp back to an LLC involves "revoking" your S corp election, which includes providing a statement and all shareholders’ names and TINs.

Business Structure Tax Implications

What is the best tax structure for LLC? An LLC typically pays more taxes when taxed as a sole proprietorship. To pay less in taxes, LLCs can elect an S Corp status, taking advantage of the new tax law’s possible 20 percent deduction for small businesses with income under certain thresholds.

Whether to choose an LLC or S Corp often involves considering asset protection, legal liability, and tax implications. An LLC S corp election can result in savings on employment taxes and offers many tax advantages for LLC owners.

An LLC taxed as a sole proprietorship is usually better than an S corp for holding rental properties because rental income is not subject to self-employment tax.

LLC vs S Corp: Growing Your Business

Choosing between an S Corp versus an LLC involves legal and tax benefits. An S Corp categorization can lead to significant tax savings, while an LLC provides protection for personal assets. Understanding these implications is vital for effective business growth and tax management. Consulting a qualified tax professional is recommended to navigate these decisions accurately.

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