When you’re registering a business, there are a lot of things to consider. If, for example, you’re setting up an LLC in the Sunshine State, you may have to pay Florida business fees to register every year. However, the LLC is just one type of business you can explore. A different kind of corporation you can look into is called an S-Corporation (S-Corp in shorthand). There aren’t separate and distinct entities, either. Sometimes an LLC might be an S-Corp. So, what’s the difference between an LLC and an S-Corp? And when should you use one or the other?
What Is an LLC?
Business News Daily informs us that an LLC is a hybrid legal entity that demonstrates the characteristics of a sole proprietorship, partnership, or corporation. Many business owners opt for an LLC because it seeks to protect the interests of their personal assets. If the LLC is involved in a legal battle, their individual earnings and all tangible assets that belong to them can’t be used in any of the company’s settlements. For members of an LLC, this helps to separate their business dealings from their personal acquisitions.
The LLC has the option to be taxed as a sole proprietorship, and this brings with it some benefits. If the LLC members set up the business to be taxed as an LLC, they can register the company as a pass through entity. This status translates to each member’s earnings from the LLC coming to them directly. They would pay taxes based on the income they receive from the company at an individual level and would have to file as self-employed. Being paid through an LLC adds self-employment tax on their income, but the company retains its portion of the proceeds intact.
The other option to a pass through entity is to register the LLC as an S-Corp. When the business is taxed as an S-Corp, the members are paid a “reasonable salary” from which taxes are deducted before they receive it. The LLC would treat this payment as a regular payroll payment. It even reports these payments as business expenses.
What is an S-Corp?
S-Corp is a classification that allows the IRS to know that the business needs to be taxed as a partnership. Only C-Corporations or LLCs are permitted to be registered to pay taxes as an S-Corp. S-Corp classification requires that the company have anywhere between one and one hundred shareholders. These shareholders, as explained before, collect paychecks as employees of the business. An additional stipulation is that only companies that exist on American soil may get S-Corp status. An S-Corp isn’t a type of business entity, but a classification method to allow for taxation.
Which One is Better for a Small Entrepreneur?
When you first start as an entrepreneur, registering as an LLC is a good idea. Money Crashers mentions that for small companies, registering the LLC, then setting it up to be taxed as an S-Corp is a viable strategy. It comes back to what the members of the LLC prefer and which one benefits them the most. The first step in the entire process starts with registering the LLC as an entity.