An LLC seems to be the favored manner to structure a small business. In some circumstances, however, it may make more sense to choose an S Corp over an LLC.
Limited Liability Companies, which got their start in Wyoming in the 1970s, have become the most popular and often used structure for starting up small businesses. This is because the Limited Liability Company has the tax advantages of a partnership and the protections against liability of a corporation. Also, owners of a Limited Liability Company need not comply with the formalities of a corporation. best LLC service
Limited Liability Companies have many benefits for their owners, called members, but those benefits might not be all too good at tax time in the case of a single owner LLC.
States generate a lot of revenue through governing the development and processes of small business. The state takes fees for starting your business and bites at the apple all the while you struggle to maintain it. In haste to collect revenues, most states have allowed for the operation of single owner Limited Liability Companies, but the Internal Revenue Service has not.
The Internal Revenue Service sees single owner Limited Liability Companies as sole proprietorship, and taxes them accordingly. This leaves the operator of a single owner Limited Liability Company in a poor position tax wise. The owner of this sort of LLC must report their finances on schedule C of their income tax returns, among other negative tax implications, this forces the sole owner of a Limited Liability Company to pay a 15.3% self-employment tax.
In this instance, the proprietor of a single owner Limited Liability company would do much better to structure the company as an S Corp. Sure, there will be some more regulations and restrictions to follow in a corporate structure, but you are the only owner. How hard could it be?
Certainly, structuring your company as an S Corp is not so difficult that it would justify all the negative tax implications of a single owner Limited Liability Company.
In order to fully understand the way to best structure your business to lower your tax liability as much as is legitimately possible, you will want to talk to a business tax professional. If you are in business, you should not try to tackle all the tax complexities the Internal Revenue Service and the state have built around your endeavor on your own. Avoid problems with all tax entities by working with a business tax professional, and get back to the business of doing your business.
If you own a small business, it is advantages to use S-corporation to carry on such business. What are the exact tax advantages and benefits? Chintamani Abhyankar provides very useful tips.