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Bay Area Tax Services

Which is Better: LLC or S-Corp?     

Running a business needs a lot of things to be considered as a whole. However, legal structure and tax category that a company falls under is an important part of setting up business. It’s a crucial decision which will impact your bottom line and profit-sharing method. What is right for one company may or may not be correct for the other. There are 5 basic legal structures: Sole Proprietorship, Partnership, S-Corporation (S-Corp), C-Corporation (C-Corp) and Limited Liability Company (LLC). Sole Proprietorship, Partnership and S-Corp are called pass-through entities since the taxable income of the company passes through owner’s tax return.

An LLC (Limited Liability Company) is a legal structure of the business whereas an S-Corp is a tax category. LLC is one of the most prominently used entity type by people all around the world. An LLC can choose to file their taxes as an S-Corp or C-Corp if it qualifies. The advantage of an LLC is that it protects its members assets from company liabilities or debts. An LLC is a separate entity from its owner. By default, LLCs are taxed as sole proprietorship or general partnership. That means when the profit passes through the owners, it’s taxed at owner’s tax rate plus an additional Self-Employment tax is also levied. They need to opt to file as an S-Corp or C-corp. The owners

An S-Corporation (S-Corp) is a US-based corporation body that holds some special facilities for tax benefits. The total tax calculation is passed directly to the shareholders of the corporate company. The company will file a return, but the taxable income is passed to the owners through a K1-Form.The taxes are paid at the shareholder’s income tax rate.

S-Corp can be any individual (holding a US citizenship), certain trust or estate or certain tax-exempt organizations. Aside from tax purpose, the other features of an S-Corp are similar to that of a C-Corp. It offers similar liability protection, have board of directors, follow certain internal practices, conducts shareholder meetings like a C-Corp. S-Corp is an appropriate choice for small and medium size private companies.

Conclusion: –

The big question is, if an LLC can choose to file as a C-Corp or an S-Corp then why remain as an LLC? LLC gives a better liability protection than a Sole Proprietorship or Partnership. And when compared to C-Corp or S-Corp, the complexity of setting up the business and regulations to follow are much lesser and not stringent. Also, it gives a flexibility of changing the tax structure at a future date. So, contact your CPA today to decide what’s the correct legal and tax option for your company.

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