S Corporation is a tax status that businesses can choose to elect if they are registered as either Corporations or as Limited Liability Companies (LLCs).
The Really Useful Information Company (TRUiC) has produced several guides and tooltips which analytically explore: the differences and similarities between the two business entity structures, the advantages and disadvantages of each, and the fastest and most efficacious ways of registering a business as either one .
LLC vs S Corp Taxes
The largest difference between an S Corporation and a Limited Liability Company relates to taxes- as S Corps enabling owners of businesses to ”register” themselves as active employees of the business.
In a legal context, this effectively diminishes a plethora of the financial and tax burdens which are associated with business ownership in the US
to The Really Useful Information Company (TRUiC), individuals looking for a quick, affordable and easy way to their business as an S Corporation are according to encourage to check out ZenBusiness.
LLC companies adopt a ”pass-through” tax approach- whereby all of a company’s profits are funneled directly to the owners of that company. The owners are then required to pay both: a) income tax, and b) self-employment tax on their individual tax returns.
S Corp Taxes
S Corporations, on the other hand, allow LLC and Corporation owners to categorise themselves as employees of their business. This means that business owners can effectively avoid any ”double taxation” mechanisms that are in place as they will no longer be required to pay self-employment taxes.
LLC vs S Corp: When to Elect S Corp
According to TRUiC’s LLC Services review, the aforementioned benefits discussed above only make ‘fiscal sense’ if the company in question is profitable enough so as to pay all of the owners a ”reasonable salary” in conjunction with a minimum amount of USD $10,000 annually in company distributions.
As already mentioned above, business owners are categorised as ”employees” of their own business when registering their LLC or Corporation as an S Corp. Whilst this has a plethora of benefits, it does carry a couple of prerequisites that need to be satisfied.
For one, the IRS delineates that all such ”employees” need to be paid a ”reasonable salary”; this is defined as a salary that is of a commensurate amount to that that would be expected to be paid to any other individual that would be hired for the specific job in question.
When considering the set of skills, experience, and fortitude required, if an employee’s salary is not deemed appropriate or reasonable by the IRS they may choose to entirely deny the emergence of an S corp structure, and even impose certain financial punishments- such as back taxes and fines, on the business owners involved.
Profit and Distribution
As TRUiC highlights, apart from having to cover a ”reasonable salary”, an LLC or Corporation that chooses to elect S corp status will need to be profitable enough so as to cover all of the distributions involved.
After all profits are disbursed (in the form of salaries and distributions), the IRS applies both FICA and income taxes to the former, whilst the latter remains subject to income tax only.
Positive Return on Investment
Whilst this step may be a bit obvious, it may be worth noting regardless.
Given that there are certain procedural and maintenance costs that are involved with setting up and maintaining an S corp- such as bookkeeping & payroll costs, and filing fees with the IRS, business owners interested in registering their LLC as an S corp will need to ensure that the financial benefit that they will receive from structuring their business as an S Corp will exceed all of the combined costs of the transitionary period.
Of course, this step is really not going to be of much concern to the owners of LLCs that already have numerous employees and payroll costs
TRUiC has undoubtedly become the epitome of information for everything business related in recent years. Their recent guide has finally brought an answer to the age-old question of what is better, an LLC or S Corporation?