S.Corps v. LLCs

What’s all the fuss about S-Corps? I mean what is an S-Corp anyways? Suddenly, everyone wants one lol. Well…

LET’S TALK ABOUT IT!

An S Corporation (S-Corp) is NOT a business structure or the same as a standard Corporation (C-Corp). It is also NOT a business entity that you register with your Secretary of State.

When registering your business, you have the option to register as a Sole Proprietorship (never select this option), an LLC, a Partnership, or a Corporation. Each option offers different benefits, so the one you choose will depend on your business goals.

– Click here to read more about how LLCs differ from other business structures.

An S-Corp is simply a tax election.

It is a way that you, as the owner of an LLC, can choose to be taxed.

– Regular corporations experience double taxation whereas LLCs do not. Income received by corporations are taxed at the entity level and again at the shareholder level, when dividends are issued. LLCs on the other hand can have income pass through to the individuals’ tax return and therefore bypass double taxation.

– While this is a great tax advantage compared to corporations, LLCs also have the option of choosing S-Corp tax status.

So, what is the big deal about S-Corps and how much can you save? Well, it depends.

With this election, you may end up saving on Self-Employment taxes. Without this election the income received by the LLC that passes through to the members will be taxed at the Self-Employment tax rate on member’s tax return.

Both Social Security and Medicare taxes make up the Self-Employment tax. As of the time this blog was written, the Self-Employment tax rate is 15.3% with 12.4% going to Social Security and 2.9% going to Medicare.

If you are interested in more information on this and other tax requirements, you can always visit IRS.gov. They will always have the most updated tax rates and laws.

But here is my breakdown on this whole “S-Corp” thing:

In general, this election lowers the taxable amount for the company. This is based on you, the owner, paying yourself a reasonable salary. The reasonable salary you pay yourself is the only portion that would be subject to Social Security and Medicare taxes. For example:

As an LLC without the S-Corp tax election:

If you make $100k and have $25k of business expenses, your taxable amount is $75k. You will pay Self-Employment taxes or 15.3% on the $75k which is $11,475. So, after taxes you are left with $63,525.

As an LLC with the S-Corp tax election:

If you were to make that same $100k, have $25k in business expenses, AND pay yourself a reasonable salary of $45k per year, your taxable amount is the $45k. Since you have the S-Corp election, you will only pay Self-Employment taxes on your $45k salary. So, you only paid $6,885 in taxes. After taxes you have $23,115 available for distributions that are not subject to taxes. This would result in you receiving a total earning of $68,115 and a tax savings of $4,590 (11,475 – 6,885).

While this election offers multiple tax benefits, as a company being taxed as a S-Corp, keeping good records, and going through various business formalities are required to maintain this status. This includes choosing a board of directors, having bylaws, having meetings, and maintaining meeting minutes. Just as with a standard corporation, choosing the S-Corp status is a bigger responsibility.

REMEMBER: Anytime this election is being considered, it should be discussed with your accountant or tax professional. They will be able to accurately explain all aspects of making this decision. After speaking with your tax preparer, you should speak with your attorney to make sure you are compliant with all legal requirements regarding the new election.