LLC or S-Corp: Which One is Best for Me?

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Choosing the right business structure is a crucial step for small business owners. The right choice not only helps protect personal assets but also optimizes tax strategies. While some may think forming a business entity is an unnecessary expense, many owners opt for an “all up” LLC or S-Corporation to gain liability protection and tax benefits.

Key Differences Between an LLC and an S-Corporation

Both LLCs and S-Corporations are pass-through entities, meaning that profits are taxed on the owner’s personal return rather than at the business level. However, there are significant distinctions between the two:

• LLC: This structure is simple to manage with minimal formalities. All profits pass directly to owners as self-employment income.

• S-Corp: This structure requires corporate formalities such as board meetings and record-keeping. Owners must be paid a reasonable salary, but the structure allows some income to be taken as dividends, thereby reducing self-employment taxes.

Tax Savings: How an S-Corp Can Reduce Self-Employment Taxes

Self-employed individuals are subject to a 15.3% self-employment tax on earnings, which covers Social Security and Medicaid plus Medicare. An S-Corp can offer tax savings by structuring income as a combination of salary and dividends. For example:

• LLC Owner (100% SE Taxable): $100,000 profit results in $15,300 in self-employment taxes.

• S-Corp Owner (Salary + Dividends): A $75,000 salary plus $25,000 in dividends results in $11,475 in self-employment taxes.

• Savings: This results in a $3,825 reduction in tax liability.

(Note: The salary must be according to fair market value so there are limits to this approach.)

Choosing the Right Structure

An LLC is ideal for those seeking flexibility and ease of management. In contrast, an S-Corporation is often beneficial for businesses with growing profits that aim to reduce self-employment taxes. The advantage is that if you start as an LLC, you can later elect S-Corp taxation as your income increases.

• Recommendation: Go with a comprehensive LLC plan because it offers the most flexibility and ease of operation with the ability to convert to S-Corp tax treatment immediately or in the future.

Curry Andrews, Attorney at Law