LLC vs S Corp - What is right for my business?

You have started your business and are ready to reap the rewards of working for yourself. When choosing how to structure your business, it is essential to understand the differences between LLCs and S-Corps. This will help you make the best decision for your business.

An LLC is ideal for many small to medium businesses. It gives you legal protection of your personal assets and doesn’t affect your taxes compared to operating as an individual or independent contractor. If you form an LLC you will be taxed as a sole proprietorship by default. You do have the option of electing an S Corp taxation to reduce these tax liabilities.

As a single member LLC, you are taxed as a sole proprietorship and pay a self-employment tax of 15.3% on all of the taxable income you earn from your business. You also pay personal income tax at a rate determined by your tax bracket. With the S Corp election, you personally pay about ½ of the self-employment tax and a small FUTA tax taken out of your regular paycheck. The business pays the other half in payroll taxes which can be written off as a tax deduction. Any other company profits, you can take as a distribution which is not subject to payroll taxes.

There can be disadvantages of an S Corp election as well. Taxes can become more complex because you have to pay yourself a regular paycheck and deduct payroll taxes throughout the year. You are also required to pay estimated taxes for the business quarterly.

As an employee-owner of your business, you can decide your salary. The IRS will require this salary to be “reasonable compensation”. Generally, you should pay yourself at least what other businesses would pay you for similar services. You can adjust this compensation based on your business’s unique needs such as profit, the amount of hours worked, and how much of the profit is related directly to your contributions.

When deciding if this election is right for you, take a look at the profit your business earns or will earn. If you earn approximately $80,000 or more in profit through your business, an S Corp election is probably beneficial. Making this election will reconfigure the income that is subject to the self-employment tax and will usually result in a lower tax bill.

Here is an example of what you could save with an S Corp election while drawing a salary of $50,000 and also taking $50,000 as distributions.

	LLC Sole Proprietor	S Corp
​Profit (after payroll)	$100,000	$45,741
Self-employment tax (15.3% on 92.35% of income)	$14,130	$0
Employer payroll tax (7.65% + FUTA tax)	$0	$4,259
Employee payroll tax (7.65%)	$0	$3,825
Total Taxes	$14,130	$8,084

If an S Corp election is right for you, making the switch is easy. After incorporation as an LLC and meeting the requirements for an S Corp election (such as having less than 100 shareholders) you can then file form 2553, “Election by a Small Business Corporation”. Contact Balanced Business Services to help!