Is it better to be an LLC or S-Corp?

When you are self-employed, choosing the right business structure can significantly impact your taxes, liability, and overall financial health. Limited Liability Companies (LLCs) and S Corporations (S-Corps) are two of the most popular choices. While both options offer distinct advantages, deciding between them depends on your business goals and personal circumstances. We break down the key differences and help you determine which might be the best fit for your needs. At any time, you can always reach out to Waldman Accounting to help weigh your options.

What is an LLC?

A Limited Liability Company (LLC) is a smart choice for small business owners who want personal liability protection without the formalities of a corporation. It’s ideal for businesses with one or a few owners looking for flexibility in management and taxation. 

LLCs suit startups, freelancers, and small partnerships that want to keep things simple while retaining the option to grow. If your business is just starting or you want minimal regulatory requirements, an LLC is a solid option.

Benefits of an LLC

  • Flexibility: LLCs are highly flexible in terms of ownership, management, and taxation. They can have one or multiple members (owners) and allow for informal management structures.
  • Liability Protection: Like an S Corp, LLCs protect owners’ personal assets from business debts and liabilities.
  • Taxation: By default, LLCs are taxed as sole proprietorships (if one owner) or partnerships (if multiple owners). Profits pass through to the owners’ personal income tax returns. However, LLCs can also elect to be taxed as an S Corp if it benefits them.
  • Ease of Setup and Operation: Setting up an LLC is generally simpler and involves less paperwork and ongoing requirements compared to an S Corp.
  • Transition to S Corp: One advantage of starting as an LLC is that you can keep things simple early on. Once your business grows and you have consistent, recurring revenue, you can choose to change your tax status to an S Corp. This allows you to take advantage of potential tax savings as your business becomes more established.

Pros and Cons of LLCs for Self-Employed Individuals

Pros:

  • Simple setup and maintenance
  • Flexible management structure
  • Broad tax classification options

Cons:

  • All profits subject to self-employment taxes
  • May not offer the same tax savings as an S-Corp

What is an S Corporation?

An S Corporation is a great choice for more established businesses with consistent profits, as it can help reduce self-employment taxes. It’s ideal for small to medium-sized businesses that can meet the stricter requirements, like paying reasonable salaries to owners and limiting ownership to 100 U.S.-based shareholders. S Corps are suited for businesses looking to optimize tax savings while maintaining personal liability protection. If your business has predictable revenue and you are ready for more formal structure and compliance, an S Corp could be a smart option.

Benefits of an S Corporation

  • Corporate Structure: An S Corp is a tax designation, not a business entity itself. It’s often used by corporations or LLCs that meet certain criteria. It has a more rigid structure with shareholders, directors, and officers.
  • Liability Protection: Like an LLC, an S Corp also provides liability protection for its owners.
  • Taxation: S Corps have “pass-through taxation,” meaning profits are reported on the owners’ personal tax returns, avoiding double taxation. Additionally, S Corps can help reduce self-employment taxes since owners can pay themselves a salary and take additional income as distributions.
  • Restrictions: S Corps have stricter rules, such as a limit of 100 shareholders, and all shareholders must be U.S. citizens or residents.

Pros and Cons of S-Corps for Self-Employed Individuals

Pros:

  • Potential tax savings through salary and distribution split
  • Liability protection similar to an LLC

Cons:

  • More complex setup and administrative requirements
  • Stricter eligibility criteria

LLC vs S Corp: Key Considerations

  • LLCs are ideal for those who want simplicity and flexibility, especially in the early stages of their business.
  • S Corps may be better for businesses aiming to save on self-employment taxes, provided they can meet the stricter operational requirements.
  • For an S Corp your business should be at a point where the owner can pay themselves a reasonable salary, comparable to what a business would pay an employee for performing similar job duties. If you are not at this point an LLC would be better.
  • Starting as an LLC and switching to S Corp status later can be a strategic way to grow your business, keeping things simple at first and optimizing taxes once your business is more established.

Choosing between an LLC and an S-Corp as a self-employed individual requires careful consideration of your business’s financial and operational needs. While an LLC offers simplicity and flexibility, an S-Corp can provide tax advantages if your business is generating higher profits. Consulting with a tax professional or business advisor – which we have on staff at Waldman Accounting – can help ensure you make the best choice for your unique situation.

Have questions? Talk to our experts.

Phone

954-347-9647

Email

ianwaldman@waldmanaccounting.com

Address

Ft. Lauderdale, Florida