LLC vs S Corp
Many small business owners structure their businesses as either an LLC or an S-corporation. There are pros and cons to both with the main differences lying within the taxes. Here we will take a look at the difference between tax on s corp and tax on LLC so that you can make a more informed decision about what structure is best for you.
What Do You Pay Tax On?
While all businesses pay their taxes on their net profit or loss, the way this works varies between an LLC and an S corporation.
S corp tax requires you to pay on both your salary and your net profit. So if your salary was $40,000 and your share of net profit was $20,000 you would pay on $60,000 in taxable business income.
In comparison, an LLC structure only requires payment on your portion of ownership. If you had 50% ownership of the company and the net profit was $100,000, you would pay tax on $50,000 or half the profit.
Because of this difference, and the applicable payroll and state corporation taxes, S corps tend to spend more in taxes than an LLC.
The Dangers of Each Structure
One downfall of an LLC is that because owners do not have to pay into funds for unemployment or disability, they are not eligible for these benefits should they need them. So while you will save money on taxes, you have to decide if sacrificing access to those benefits is something you want to risk.
Another danger of an LLC structure is that if you do not keep up on quarterly tax payments you can end up in trouble with the IRS later on. So you have to good bookkeepers or strong accounting skills to manage your money through the year.
A downfall of the S corp structure other than the heavier tax on s corp is that you have to be able to pay a reasonable salary to all business owners. If your net profit and the reasonable owner salaries do not add up, that can be troublesome when it comes to tax time.
In the end there is a simple solution if you are unsure about which way to go. Tax laws will allow you to switch from an LLC to an S corp, but not the other way around, so it might be best to start out as an LLC and see how it goes. If it turns out that the tax on s corp is more appealing than the struggles than come with being an LLC, you can always switch.