If you’re setting up a business in Long Island or anywhere in the surrounding area, you'll have several options regarding to how you structure it — especially if you’re just one individual. The default option for many Americans is the a sole proprietorship (SP), which is a good choice over working as yourself as an independent contractor.
However, you can take it one step farther and gain even more advantages by setting up a separate entity as an LLC or an S-Corp. Choosing between an LLC and an S-Corp can be confusing at first, but making the wrong decision could result in you paying more money than necessary. While an LLC and an S-Corp have a lot in common, they also have important differences.
Simply put, the tax differences between an LLC & S-Corp can affect your bottom line before and after taxes. Keep reading to understand the important differences between an LLC and an S-corp so you can make the right decision for you and your business.
What Is a Limited Liability Company (LLC)?
A limited liability company is a business structure designed to keep pass-through separation of the business and the business owner(s). It is similar to a sole proprietorship or partnership, with an important distinction: it is separate from the person or persons who created it.
This helps protect the individuals in the event of a lawsuit or other difficulty. Sole proprietors who don’t create an LLC can have their personal assets in jeopardy in a lawsuit against their business.
With an LLC set up, the business itself doesn’t pay income taxes on its profits. Instead, any profits or loss are passed through to the owner(s) and reported on personal tax returns.
What Is an S Corporation (S Corp)?
In many ways, an S corp functions the same as an LLC and is also a separate entity set up to protect the owner or partners of the business. S-Corps have more extensive internal formalities that can vary by state, so it's best to meet with a local tax accountant for guidance and assistance.
If you're a Long Island business, you visit the New York State Department of Taxation and Finance website for more information. In any case, an S-Corp will usually pay more in taxes than an LLC because of more payroll taxes and any applicable state corporate taxes.
What Are the Tax Differences Between an LLC & an S Corp?
The importance of a correct structure cannot be overstated, so it’s crucial to understand the tax difference between an LLC & S-Corp. Both are pass-through entities where the profits or losses can be passed through to the owners.
Although S-Corps will always file a tax return for the business, LLCs will only file a business tax return if it has more than a single owner. The business doesn't pay income taxes with pass-through taxation. Instead, all necessary taxes are paid out and reported at the individual level.
- A limited liability corporation makes tax payments on the net profit by paying quarterly to the IRS based on estimations.
- A corporation, on the other hand, must submit a tax return and pay income taxes on its profits.
- An S corp’s owner’s salary is subject to state unemployment and disability taxes, unlike an LLC’s.
What this means is all of an LLC business owner’s profits are taxable as income. On the other hand, S corp owners are employees of their company, so they must pay themselves a reasonable salary – which can be all business profits. As a result, the owner will still pay business taxes on just about all of the profits.
If it seems as though S corp owners would pay more in taxes, that may or may not be true. The advantage to an S corp structure is that business losses can be deducted from personal taxes for the owners. Owners are allowed to offset non-business income with losses from the business. Additionally, an S corp can provide savings on self-employment or Social Security/Medicare taxes.
Is an S-Corp or LLC the Better Business Entity for Taxes?
In the end, everyone's situation is unique. Determining which business entity is better should be viewed on a case-by-case basis. One instance where an S-Corp may be a better option for taxes is if you're just starting out with high costs and expectations of profits later down the road.
In this case, the S-Corp entity may be more beneficial. However, it's best to have your business goals and plans reviewed by an experienced certified public accountant to ensure you're set up for success.
Contact John F. Dennehy Jr. CPA, PC Today
Regardless of whether you choose an LLC or S-Corp, your business may not need a full-time accountant. Most businesses in the Long Island area, choose accountants who can provide accounting services on demand, such as:
And the experts at John F. Dennehy Jr. CPA, PC can provide the services you need when your business needs them. We'll help ensure your business approaches tax filing and preparation carefully and thoroughly.
Contact the team at John F. Dennehy Jr., CPA today for assistance with your LLC or S-Corp tax filings