If you are looking to start a business in Florida or are looking to change your current business structure, there is a good chance you are considering either an LLC or an S-corporation (S-corp). These are popular choices thanks to the personal liability protection they offer against creditors. Both options are proven choices for small business owners. Which is the better choice for your business will depend on some of your priorities or structural needs. For example, LLCs tend to offer greater flexibility in management, whereas S-corporations provide great structure for employment tax benefits. If your greatest priority is privacy, you might favor an LLC, as this entity can offer complete anonymity. S-corps, on the other hand, are subject to public disclosure rules.
An S-Corporation, or S-corp, is a tax designation that can be applied to both corporations and LLCs. To achieve an S-corp classification, the company must submit a request to the IRS. With an S-corp tax structure, the shareholder is allowed to draw a salary and collect dividends. Self-employment tax is paid on any salary and will be higher due to paying Social Security and Medicare as both employee and employer. However, any dividends will be taxed at a lower income tax rate. If applied correctly, this method can result in significant savings.
Limited liability companies, or LLCs, are a widely used and popular business entity choice. Some of the main advantages of an LLC are:
The pass-through classification that LLCs enjoy allows for business profits to “pass-through” to members of the business. The members are then responsible for paying the necessary taxes on their personal tax return rather than that of a separate return for the LLC entity. This process avoids the double taxation that corporations experience. The amount each member receives from the LLC’s profits often corresponds to their ownership share in the company. The member then reports profits and losses on their personal return, reporting a loss when the company loses money and a gain when it is profitable. If your LLC is formed and managed properly, it will offer your members attractive tax benefits and strong personal liability protection.
Depending on your business type, there are a few potential drawbacks for LLCs to keep in mind. For example, if your business generates high income, that income is subject to self-employment tax. The tax rate that applies to your LLC profits could be higher than the rate that applies to corporations. Additionally, LLCs tend to have limited life spans, unless specifically addressed in its operating agreement.
An LLC can elect to be classified as an S-corporation by applying with the IRS. The benefits of an LLC having an S-corp classification are:
In some ways, an S-corp is a cross between an LLC and a C-corp. For example, S-corporations enjoy tax benefits, such as pass-through taxation, while also having shareholders as owners instead of members. One of the main reasons an entity might opt to utilize an S-corp classification is the ability of the owners to pay themselves an attractive salary. While the salary remains subject to FICA tax and withholding requirements, the owners can distribute net earnings as dividend income, which is not subject to any self-employment tax.
There are a few ownership differences between LLCs and S-corps. For example, the IRS can place certain restrictions on S-corps that don’t apply to LLCs. S-corps cannot have more than 100 owners, while LLCs can have unlimited membership. Additionally, any non-U.S. resident or citizen is prohibited from being an owner of an S-corp, while there is no such restriction for LLCs. S-corps are not allowed to be owned by an LLC, partnership, or C-corporation. However, LLCs have no ownership restrictions that pertain to any of these entities.
Be sure to weigh your options thoroughly when deciding which entity type will work best for your business. Each offers their own benefits to correspond with varying business type, industry, and more. If you are uncertain which entity type to choose for your business, consider seeking advice from an expert attorney. Making the right decision early on can save your business in the long run.
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