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Tax Fact: S-Corp or LLC?
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Question… Should I have an S-Corp or should I have a Single Member LLC?
Limited liability companies(LLC) and S corporations share several benefits for sole proprietors, including protecting personal assets from business creditors.

Choosing between a single-member LLC vs. S-Corp is a common conundrum for new business owners who are planning to establish a formal entity. Limited liability companies and S corporations share several benefits for sole proprietors, including protecting personal assets from business creditors. Your financial investment in the business is the limit of your liability.

These entities also share an advantageous tax structure that allows them to avoid the double taxation that affects corporations. With an LLC, profits and losses are reported on the owner’s individual tax return, while in an S corp, the owner is paid a salary for his or her work and receives additional profits as dividends.

Both types of businesses can deduct expenses before taxes, including those for uniforms, travel, phone and internet, computers, promotion, advertising, cars, gifts, and health care premiums.

Pros of establishing a single-member LLC include:

* The ability to avoid double taxation
* Easy setup, typically involving only a one-page form
* Inexpensive setup cost averaging a few hundred dollars
* Fewer state requirements than corporations, such as filings and meetings

Potential negatives of this business entity include:
* Subject to self-employment tax and quarterly IRS payments for LLC income
* The need to fully separate business and personal affairs to protect limited liability
* An LLC can also opt for S corporation tax treatment while retaining its LLC structure.

Pros of an S corp include:
* Tax advantages when distributing excess profits to owners
* The ability to pay employees a reasonable salary and deduct taxes and other payroll expenses,

However, potential disadvantages include:
* Stricter state requirements than LLCs
* Higher formation costs
* Passive income limitation of 25 percent of gross receipts, including investment in real estate
* Possible higher state taxes
* Increasing IRS scrutiny of salary structures

The state requirements for S corporations include a limit of 100 shareholders, all of whom must be U.S. citizens or permanent residents. This entity can only offer one stock class. Shareholder distributions must be made proportionally to their interest stake in the company. This structure is best suited for fast-growing businesses and those that plan to attract additional investors and shareholders.

If you have a small business, come visit with us here at Red Rock Tax & Consulting. We are here to help take the stress away so you can enjoy your business! Set up an appointment today and take advantage of our FREE 30-minute consultation! From all of us here at Red Rock Tax & Consulting; Stay Safe, Stay Healthy, and remember… ” No one ever made a difference by being like everyone else.” – P.T. Barnum

Have any questions, give us a call here at Red Rock Tax & Consulting. We are here to help you get through the stress of taxes! We offer a free 30-minute consultation so call us and let’s get your appointment set up 435-635-2494

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