The Tax Advantages of LLCs Over S-Corporations

By William Pirraglia

Limited liability companies and S corporations are quite similar from a tax perspective. They are, however, quite different from a legal structure comparison. The most prominent tax advantage of an LLC is its ability to "choose" how it is taxed. A corporation has only two options: to be taxed as a regular C corporation or to be taxed as an S corp, pursuant to Sub-chapter S of the Internal Revenue Service code.

Different Legal Entities

LLCs are "creatures of the state," not really recognized by the federal government or IRS. S corporations are legally the same as standard (C) corporations. They simply choose to be taxed under the regulations of Sub-chapter S or the IRS code. LLCs, while legal entities of the state in which they are formed, must select their preference for tax treatment -- no choice of which is to be taxed as an LLC. There is no provision in federal law for the existence or tax treatment as an "LLC."

LLC Tax Treatment Choices

Multi-member LLCs can choose to be treated as S corporations, C corporations or partnerships. Single-member LLCs (one owner only) can opt for S corp, C corp or sole proptietorship tax treatment.This flexibility can generate tax savings, if used properly. However, in some cases, this potential benefit becomes a detriment when compared to legal S corps. Single-member LLCs have the greatest potential for detriment as the IRS calls them "disregarded entities" if you select sole proprietorship tax treatment. You would then be subject to all self-employment taxes when you prepare your Schedule C for your annual tax return.

Ready to start your LLC? Start an LLC Online Now

S Corp Tax Treatment

An S corporation is not a separate entity from a C corporation. Unlike an LLC, which must select an existing tax treatment, since no LLC tax rules exist, an S corp follows all regulations of a C corp, except for its tax treatment. Selecting S corp treatment makes it look much like an LLC. An S corp is treated as a "pass through" entity, like an LLC, paying no corporate taxes on its profits. However, even single-owner S corps are liable for payroll taxes for all wages paid. All remaining profit, however, is passed through to S corp owners, to be included in their personal tax returns.

Tax Considerations to Receive Tax Benefits

While you must consider other operating issues when choosing between an LLC or S corp, tax liability is always prominent. The most decisive concern with an LLC is your choice among S corp, C corp and sole proprietorship tax treatment. Since corporate tax rates, although often changed, typically are higher than personal tax rates, a sole proprietorship is often the best option for single-member LLCs. However, should you draw an impressive salary from your LLC, and pay your payroll taxes as required, your lower profit after subtracting your compensation, may benefit from S corp treatment more than proprietorship treatment.

Partnership Vs. LLC Tax Considerations

If your LLC is really a partnership, you typically benefit from LLC treatment instead of incurring the extra cost of forming, filing and maintaining an S corporation. For tax purposes, the LLC will funnel all profits to the partners for inclusion in their personal tax return. Partners also enjoy the personal asset protection they are denied in a legal partnership structure.

Ready to start your LLC? Start an LLC Online Now
Tax Advantage of LLC Over S Corp
 

References

Resources

Related articles

Difference Between LLC & Inc

A limited liability company, or LLC , is a hybrid business entity that includes some features of corporations. For example, both corporations and LLCs provide their owners protection against the debts of the business. There are some crucial differences, however, that should be considered when choosing the best form for your business.

What Is the Difference Between an LLC & an S Corporation?

Both a limited liability company, or LLC, and an S Corporation, or S-Corp, offer an owner limited liability protection. An S-Corp is a corporation that qualifies under subchapter S of the U.S. Tax Code to be taxed as a partnership rather than as a corporation. An LLC can elect similar tax status, but without the regulations and restrictions inherent in the corporate form.

S Corp vs. LLC

Among the many business organization choices facing the start-up entrepreneur stand the limited liability company (LLC) and Subchapter S corporation (S corp). Both forms offer features that make them attractive vehicles for both small and large businesses alike, with several similar advantages that can make picking one over the other difficult in some cases. Deciding on whether to form an LLC or incorporate and file for Subchapter S status requires an understanding of each form.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

LLC Vs. Inc.

People often confuse LLCs (limited liability companies) with corporations (Inc.). They are, at first glance, similar, ...

Definition of a C-Corporation

Classification of a corporate entity as a C corporation rests entirely on whether it’s subject to the income tax rules ...

LLCs Vs. S Corporations in Mississippi

If you are deciding whether to establish an LLC or an S corporation in Mississippi, you might not realize that you can ...

Tax Consequences of Converting a C-Corp to an S-Corp

Corporations are business entities formed under state law that exist separately from their owners. An S corporation is ...

Browse by category
Ready to Begin? GET STARTED