When forming your business, you have several considerations to make, the biggest of which is what type of business entity to form. After doing your research, you have narrowed down your option to an S Corp and an LLC. You heard that LLCs offer almost all of the same protections as a corporation, but that an S Corporation is better for tax purposes. Both of these statements happen to be true. So, how do you decide which offers the most amount of tax benefits, or which benefits will matter most to you in five, 10, or even 20 years?
Choosing a business entity for your company is not something you should do lightly. Ideally, you should consult with an experienced business lawyer who can advise you of the pros and cons of each entity type and help you select the one that is best for your business. If you are unsure of which entity to go with, reach out to our Mobile business law firm to discuss your needs today.
What is an LLC?
An LLC, or “limited liability company,” offers business owners protection against the company’s actions and debts in much the same way that a corporation would. The legal entity is separate from the owners, who are “members.” Though this type of formation offers owners the same protections as a corporation, it offers more flexibility in the way that it is managed. It also comes with less reporting obligations and recordkeeping restrictions that dictate corporations.
What is an S Corporation?
An S Corporation is actually not a business entity at all. Rather, it is a designation that refers to the way a business has chosen to be taxed under the Internal Revenue Code.
Tax Benefits of Both an LLC and S Corp
Both an LLC and S Corp come with unique tax benefits. If you opt to form an LLC, you will either be taxed as a sole proprietor or a partnership, depending on how many members are in your organization. In either instance, the company itself would not be taxed. Rather, you and any other members would report the business’s income as your own and pay Social Security and Medicare taxes on that income.
If you chose to be taxed as an S Corp, however, your LLC would be taxed as though you are any other type of business. You would collect a salary, which would be considered a business expense, and report both the salary and any remaining business profit on your personal tax return. However, unlike an LLC, which requires owners to pay Medicare and Social Security on all profits, the owners of an S Corp would only be required to pay taxes on those profits used as salary.
So, Between the S Corp and LLC, Which is Right for You?
When deciding which is right for you, you should consider how much money you’ve been making, or how much money you plan to make. If you make a significant amount of money, filing as an S Corp would be more beneficial. However, if you do not make enough to edge you into the next tax bracket, you may be fine filing as an LLC. Also, keep in mind that the IRS will look into the salary you pay yourself. If it discovers that your salary is unreasonably low considering how much your business makes, you could be in trouble for tax evasion.
In addition to evaluating the pros and cons of both an S Corp and LLC, you should consult with an experienced Alabama business attorney. Contact Cloud Willis & Ellis today to schedule a consultation with one of our experienced lawyers.