Honestly, it depends. Applying to become an LLC is a great place to start, as this structure provides liability protection and tax write-offs. However, as your company grows beyond the seed stage, switching to an S-corp may make financial sense. Vincenzo Villamena, CPA and managing partner at Global Expat Advisors, said that as LLC income increases, so does the self-employment tax.
In the case of LLC, the income is paid to the owner. Owners are required to pay 15.3% self-employed tax. On the other hand, in the case of S corporation, the owner can collect income tax and apply the foreign income exclusion to minimize the income tax. S-corps may make more financial sense for many businesses, but unless there is a specific reason to switch, it may not be optimal for a single-member LLC, said Anthony Viola, CPA and senior partner at KVLSM LLP. action.
Key takeaway: Whether your company should be an LLC or an S-corp depends on the stage it is in. LLCs are generally best for new businesses, but as your business grows, you may want to convert to an S-corp to reduce self-employment taxes.
What certificates are required for LLCs and S-corps?
Understanding LLC and S-corps will help you understand Company C. Taxed under Subchapter C, C-corp is a separate taxable entity that submits Form 1120. An LLC or C-corp may convert to an S-corp by submitting Form 2553 to the IRS as long as it meets all subchapter S guidelines.
LLCs require business owners to file in the state where the LLC is formed, and those requirements can vary from state to state, said Brian Caines, CEO of ProStrategix Consulting. “Most states require some public notice, which can be expensive depending on the jurisdiction,” Cairns said. “In New York State, for example, you have to advertise in the county where the LLC is formed. If you are in one of the five boroughs of New York set up, which could cost upwards of $1,000.” For S-corps, you need to file articles of incorporation in the state you want to form. An annual general meeting and additional status reports are also required.
Key Takeaways: To be taxed as an Reasonable Salary for S Corp Owners, you must complete Form 2553, file articles of incorporation in the required states, and meet the Subchapter S guidelines. LLC requirements vary by state and may require public notice.
Should I tax my LLC as an S-corp?
While the correct structure of your business is up to you, any other owners, and the business itself, you should understand the pros and cons of having your LLC taxed as an S-corp.
The company pays your wages and payroll tax. As with a regular LLC, you pay a self-employed tax on your company’s total income, which saves you tax. Additional revenue will be distributed to shareholders as dividends. This can also save you money, as dividends are less taxed than income.
There is a S Corp Reasonable Salary cap. You must establish reasonable compensation for the owner-employee.
Limited to one class of shares and 100 shareholders.
Shareholders own more than 2% of the company’s shares. They can’t have employee health insurance as a tax-free benefit like a C corporation. Having your LLC taxed as an S-corp is a big decision once you hit $60,000 in annual income, says Scott Royal Smith, founder, and CEO of Real Legal Solutions.
This allows us to split our income between personal and dividend income and lower the overall tax rate, “says Smith. Smith considers the $ 60,000 mark per year to match, usually to weigh the tax savings hidden from the government against the CPA charges. Until then, accept the money as personal income and fill out Form 1040 on your personal tax return.
Key Takeaway: Taxing your LLC as an S corporation can save you self-employment taxes. However, you will need to file an individual S-corp tax return, which means paying your CPA an additional form. S-corps are also structurally less flexible than LLCs.