One of the most important questions any small business owner should ask before forming an entity is what is the difference between an LLC and an S-corp? For the most part, the majority of business owners choose the entity that allows them to keep more money in their pocket. This post assumes that the business has a single owner.
What is the difference between an S Corporation and an LLC?
In simple terms, an S Corporation is a standard corporation that chose to be taxed as an S Corporation. It is worth mentioning that when one forms a corporation, you become a shareholder. Thus, the corporation can provide you with income by way of profit distributions (dividends) or salary. It is important to know that a corporation can provide you with protection from the personal liability against most debts of the corporation.
On the other hand, a limited liability company (LLC) can provide you with similar protection from personal liability. When you are a member of an LLC, the profit is given to your directly through distributions. Thus, you do not need to pay yourself in the form of a salary.
What are the filing fees associated with forming the entity?
LLC – Articles of Organization ($200), Certified Copy ($10), Publication ($325 – $1,200+ based on county). Thus, the total cost can reach around $1,400.
S-Corp – Incorporation ($125), Certified Copy ($10). Thus, the total cost is much more reasonable at $135.
Due in part to the publication requirement placed on LLCs in New York State, it is initially more affordable to form an S.Corporation. The publication requirement requires a notice of the organization of an LLC to be posted in two different newspapers for six consecutive weeks. Unfortunately, the price of publication is higher in some New York counties than others.
Tax Consequences of S-Corps vs LLCs
Does one entity leads to less tax liability than the other? It’s worth mentioning that this is a fact specific question. It depends on the sources of income. However, according to an experiment conducted by renowned CPA Jonathan Medows, the situations of 2 small business owners earning around $75,000 and having $15,000 expenses were compared.
After comparing the two situations, it was concluded that it does not matter whether the business owners operated their businesses as S.Corporation or LLC. Each business owner had around the same business and personal tax expenses. S.Corporation tax expenses were $20,755, and LLC tax expenses were $20,476.
Upkeep of an S-Corp typically has more ongoing tax responsibilities and paperwork, requiring you to treat yourself as an employee and not the owner. Because of this, many business owners choose to organize their business as an LLC, which can provide less ongoing housekeeping and expenses to overcome the initial expense. This is not a decision to be taken lightly and should include a discussion with a licensed attorney and tax professional because your specific situation may have other facts to consider.