By: Myracle Stevenson
Introduction:
Starting your business may seem easy but choosing the right form for your venture may seem very challenging and overwhelming as there are many types and forms of Businesses available. One of these forms is the LLC which means Limited Liability Company and another type is S corporation. In an LLC the company enjoys the benefits of the sole trader and partnerships but it also enjoys a corporation status that benefits it in the form of tax advantages. S corporations are also similar in many ways to LLCs in terms of being a separate limited liability, enjoying pass-through taxes and having limited liability protection but they are different in terms of the number of members as LLCs can have any number of members but S corps must have 100 or fewer, in terms of citizenship they are different as LLC members do not need to be US citizens but S Corp members must be and lastly, in terms of Self-employment taxes as S Corps have more benefits on self-employment taxes than LLC’s.
Tax Benefits For S Corps:
S Corps offer more tax benefits in terms of Self Employment taxes. This is because all members in an S-Corp are considered as employees. FICA taxes are always paid on the salary and the businesses earnings after the salaries are the unearned income that will not come under self-employment taxes.
Tax Benefits For LLC
For an LLC owner, the tax rate depends on the total income of the owner. If the net income is higher than the tax rate would be lower than that of a corporation. For instance, in taxable income, the corporation’s tax rate for $75,000 is 34% but for the exact taxable income, the personal tax rate is 25%. The owner of an LLC is not subject to double taxation like the corporate owner. This is because the corporate owners need to pay on the corporate net income and on any net income they receive. In a lot of states, Corporations need to pay franchise taxes but they do not require LLCs to do the same.
There is no particular category of taxation for LLC as it is new so it uses the categories of other business types. There is a system of pass-through taxation in the LLC which means that LLC will not pay direct taxes and the net income of the entire business is taxed through the personal income of the owner or owners involved in the business. So in an LLC, the business is not paying any taxes only the owner pays the taxes and the problems of double taxation can be avoided to a great extent.
Conclusion:
To conclude, both the structures provide excellent tax advantages and benefits. The tax benefits of Self employment make S Corps an amazing choice but in many ways, LLC's are cheaper and much easier than the S Corps. However, it is easy to make the switch from an LLC to S Corp in the future to reap the benefits of Self employment taxes.