What kind of business structure is the best choice for your company? When they have a successful small business, many owners decide incorporation is the next step. Not only does it help protect their personal finances (depending on the structure they choose), but it can also lessen their tax liability.
What are the benefits of S corps vs. LLCs in Jamestown, ND? Read on for an overview of the structures, and the pros and cons of each.
What are S corps and LLCs?
S corporations, or S corps, are small domestic corporations which are governed by chapter S of the IRS tax code. They can have no more than 100 shareholders, only one class of stock and have strict formation guidelines. This type of corporation is legally considered a “person” under federal law.
LLCs, or limited liability companies, are governed by state law. They can be incorporated by one or multiple people (members), but are not legally considered a person like S and C corps are. LLCs do not issue stock and generally have far more flexible formation guidelines, including guidelines on who can become a member.
Why file as an S corp vs. an LLC?
One of the biggest—if not the biggest—considerations when forming a corporation or LLC in Jamestown, ND is reducing the company’s tax burden. S corps have more robust tax benefits, which may make them more attractive to certain companies.
For example, when you incorporate as an S corp, you’ll save around 14 percent of your profits as compared to self-employment tax. S corps are required to pay their members/shareholders a reasonable salary, so no matter how much your company is earning, you personally will only be taxed on your salary. It also helps save money on Medicare and Social Security taxes. The remaining profit can be taxed as dividends, which have a lower rate. S corps also offer the opportunity to save on health insurance and payroll tax.
LLCs’ profits, on the other hand, “pass through” to the members. If they’re classified as a sole proprietor, those earnings are subject to the higher self-employed tax rate. However, LLCs can choose to be classified as S corps for tax purposes, which eliminates the higher tax rate issue. Each member will be paid a “reasonable” salary (the definition of “reasonable” varies depending on the business), which is subject to personal income tax; the rest of the profit is taxed as dividends.
Which should I choose?
Choosing between the benefits of an S corp vs. an LLC in Jamestown, ND largely depends on your type of business, how many employees you have, whether you want to issue stock and other tax concerns you may have. Ultimately, the best way to determine what kind of structure you should choose is to consult with a qualified CPA.
To make smart business choices, from structure to budget, call Craig S. Hanson, CPA today. We can help you figure out what it takes to set up your business and keep it profitable.