Still accepting new clients! Call (866) 681-2140

LLC vs. S-Corp

We receive frequent requests for consulting on what option is best for a new business — LLC or S-Corp. Due to the volume of such queries we feel it necessary to break out the advantages to each as well as a possible combined solution.

The benefits of an LLC:

An LLC provides limited liability and may be helpful for those who would like to attempt to limit possible lawsuits to their company.

The benefits of an S-corp:

An s-corp allows for multiple members and also allows you to limit self-employment taxes that would be assessed on a single-member LLC.

Before we get into the detail, we will establish a few points:

An LLC is not an IRS filing status. It is an entity type that is allowed per the laws of each state. We have experience opening LLCs in a variety of states and will be happy to open one in any of the 50 states. However, this is not an IRS filing status. How, then, is an LLC taxed? Well, the IRS will create a default status based on membership.

If there is only one “member” or owner, this is considered a “Single Member LLC” and will be taxed on your individual tax return on schedule c of form 1040. You will not be filing a separate business return in this case. Your entity would be a “disregarded entity.” There will be no separate business return. Although you can obtain a unique EIN number for this entity and list the EIN on schedule c of your individual return, no separate tax filing would be necessary on the federal level. However, each state has its own requirements for filing possible state LLC filings. We have experience with these are happy to help with any states’ LLC filing.

If there is more than one “member” to the LLC, the IRS will create a default filing status of the LLC to be a partnership. This will require a separate tax return known as a form 1065 partnership tax return. Be careful — these are typically due one month prior to your individual tax return due date. These are automatically required per the IRS if you have a multiple-member LLC and the penalties for late filing are assessed per partner per month. These can easily go into the thousands of dollars quickly if you do not file on time or file an extension. For your state, you will also have to file a partnership tax return. The profits or losses, as calculated on the partnership tax return, will then “flow through” to the individual. Although some states place a franchise, or business, tax on your partnership, the 1065 filing does not require taxes to be paid at the federal level. The taxes are passed onto the individual through the “flow-through” structure of the partnership. This is done using form K-1.

Another strategy that is not known to the common non-accountant is creating an LLC that is taxed as an s-corp. The main purpose of an s-corp filing is to reduce self-employment taxes. This can be accomplished by filing with the IRS your request to treat your LLC as an s-corp. This is done on form 2553 and must be filed prior to March 31st of any given year. However, there are some late-filing election options that we can help with if you have passed this date.

Drawbacks to single member LLC status:

  • Self-employment taxes may be high at the federal level, depending on the profits of the business
  • Some states require separate annual filings
  • Some states require separate fees to be assessed on the filing. These fees may be fixed or based on the income of the business.
  • You may wish to pay quarterly estimated taxes to the IRS as well as your state (if applicable) to avoid penalty interest.

Drawbacks of s-corp status:

  • You must run payroll to compensate yourself in an amount that is reasonable in light of the tasks you perform for your business
  • You will have a separate federal filing, which may be complex and may require bookkeeping, increased professional expense for tax preparation, etc.
  • In order to run payroll, you must also have unemployment insurance, worker’s compensation insurance, and disability insurance. Missing any of these can lead to penalties, so you must sign up for them right away as you are setting up your payroll system
  • The payroll system itself has fees and may require additional setup costs if done professionally. We recommend Gusto as we have found it to be an optimal online solution that we use for our clients operating in multiple states (and countries).
  • There are quarterly payroll reports that are necessary
  • You may wish to pay quarterly estimated taxes to the IRS as well as your state (if applicable) to avoid penalty interest.

Our firm has extensive experience setting up LLCs, S-corps, partnerships, payroll systems, as well as HR outsourcing to provide the compliance requirements necessary with your state for running payroll. This includes compliance with the various types of insurances and registrations necessary with your state and the IRS. Please feel free to contact us to discuss.

Need some help? Please fill out the form below and one of our specialists will get back to you immediately.

"*" indicates required fields

✓ Valid number ✕ Invalid number