Many new business owners can be confused sometimes with the differences between business structures. There are so many to choose out there that can be ideal for your business model, but you have to choose carefully. It is also important for business owners to understand what a business structure actually is and the definitions. In this article we will break down the difference between an LLC and S Corp and what they mean.
What is an LLC?
The main difference between an LLC and S Corp is that an LLC stands for Limited Liability Company. It is a type of business structure that you can register your business under with your partners. It can protect you from any personal liability, since all business owners are not tied to the business itself, but are protected separately. As an LLC business, you do not need to operate under your real name and have your address on the public records. You can come up with any business name that is related to the field that you are in, as long as you have LLC at the end of the name.
It also grants opportunities to business owners, such as being able to apply for a business loan and being credible as a company. Personal and professional assets are held in separate bank accounts and you can obtain an EIN number in order to be able to hire employees.
An LLC can bring great benefits to a business and can be registered in any state, as long as you hire a registered agent that resides or has their offices available in that state.
What is an S Corp?
First of all, an S Corp is not a type of business structure. It’s actually a type of IRS tax classification. So why s corporation vs llc? Well, an LLC business owner can choose to use the S Corp tax classification, in order to take advantage of employee tax. This then means that all employees including themselves can benefit from being taxed on income salaries and the business owner is able to pay for Medicare and Social Security Tax for all employees.
S Corp vs LLC
So how can an LLC owner benefit from an S Corp? If the business owner makes a great and healthy amount of salary and profit, be able to make distributions, be able to maintain S Corps taxes and meet the requirements needed by IRS, they can benefit greatly. They are able to pay for FICA taxes and pay for income tax based on distributions. However, if the business owner fails to comply with this, they will have to meet the consequences of fines by the IRS.
LLC vs S Corp
If an LLC continues to pay through the LLC classification, they can benefit greatly because whatever profit they make will go directly back into the business. Another advantage is that with an LLC classification, business owners can choose whenever they want to reinvest profit within the annual tax year. Overall, any additional costs are cut down completely if business owners choose an LLC classification over an S Corp. They can also avoid any potential fines given by the IRS, if they haven’t met the requirements that the IRS have set out for an S Corp.
Both types of tax classifications can play a beneficial role for the business owner, but it is all down to the financial situation for the business owner. If they generate a good amount of revenue for the company and are able to set themselves a realistic salary for the IRS, they are better off benefiting from an S Corp. If they cannot meet these expectations, they would be suitable to sticking to an LLC classification instead. Before a business owner decides, they need to look at their potential revenue as a long term business.