If you're in the process of starting a small business, you may be wondering what the best legal structure is for your company. There are a few different options to choose from, but two of the most popular are S corporations and LLCs. In this blog post, we'll break down the key differences between these two types of businesses so that you can make an informed decision about which one is right for you.
Also known as an "S corp," an S corporation is a type of for-profit corporation that offers limited liability protection to its owners. One of the key benefits of an S corp is that it can help business owners save on taxes by allowing them to pay themselves a "reasonable salary." The IRS defines a reasonable salary as one that is "commensurate with the services performed." Any business income beyond this salary will be subject to self-employment taxes, but this can still often be lower than what business owners would owe in taxes if they were operating as a sole proprietor or partnership. Another benefit of operating as an S corp is that it can help business owners avoid double taxation (i.e., being taxed on both their personal income and their business income).
An LLC, or limited liability company, is a type of business entity that offers its owners limited liability protection. Much like an S corp, this means that LLC owners are not personally liable for their company's debts and liabilities. LLCs also have the added benefit of being flexible when it comes to how they're taxed. Unlike an S corp, which must pay corporate income tax on its profits, an LLC can choose to either be taxed as a sole proprietor or partnership (depending on how many members it has) or it can elect to be taxed as a corporation.
When it comes to choosing between an S corporation and an LLC, there's no easy answer. The best decision for your business will depend on a variety of factors, including your tax situation and the level of liability protection you need. However, we hope that this blog post has given you a better understanding of the key differences between these two types of businesses so that you can make an informed decision about which one is right for you. Contact AG Freideman today to discuss more about your business and what is the best option for you.