What are the tax advantages of an LLC vs an S-corporation?

Both LLCs and S-Corporations are pass-through entities, which means that profits pass through the entity and to the owners as income. The owner will then pay personal income tax on the profits taken from the business. So, in an LLC, the owner(s) who also double as employees will only be paid their share of the profits and will only pay income tax on that share.

The difference is that in the same situation, where the owner(s) double as employees, but this time in an S-Corporation, the owner, as an employee, will first be paid a “reasonable salary” that is itself subject to income tax. Then the owner, as owner of the company, is also entitled to a split of any leftover profits after salaries are paid that will also be subject to a tax. So, in the S-Corporation, because you are being paid twice, you will pay two taxes.

The advantage to an LLC is that you are subject to fewer tax obligations (although total amount paid may be the same) and the form is a little more flexible. An LLC would be more advantageous if your business has fewer employees because an S-Corporation will be subject to more payroll taxes. But, as you add more employees, you may want these taxes automatically taken out through payroll.

In some situations like I mentioned above, the math could work out to be the same total and so your decision to structure as an LLC or S-Corporation would depend on other relevant factors. In general, the LLC is the most flexible form and will allow you to basically choose your own governing structure. An S-Corp, because it is a corporation is subject to more strict structural requirements.

In sum, it is important to understand your options and know the consequences of the form that you pick. For that reason, I suggest that you speak to a lawyer. If you are looking for an attorney experienced in business formation, you should visit LawTrades. Our comprehensive site offers free consultations & a money-back guarantee.