One of the most asked questions I get is “should i set up my business as a Limited Liability Company (LLC) or an S-Corporation (S-Corp for short). And the short answer is – it depends.
Depending on who you ask, an attorney or an accountant, you will get different opinions. So let me equip you with a few facts to help weigh-in on your decision.
Limited Liability Company
An LLC is easier to set up. Most states allow you to complete and file an Articles of Organization and you’re all set. This is after you have done a name search to ensure that no other business is operating in your state under the name you chose. Most states, if not all, have a generic version of this form on their website but you can also have your lawyer draft one up for you if you want it contain more detail.
An LLC allows you to allocate your profit and loss between owners more easily. In a LLC, these percentages can be allocated based on the owners participation, or lack of, in the business. With and S-Corp, this allocation is based on their share of stock in the business. It doesn’t matter if they were active in the business or not.
As an S-Corp, you can put yourself, as the owner, on payroll. Not only do you get the tax deduction on your return, but this allows you to have federal and state taxes withheld from your paycheck and paid on your behalf. This can help reduce your tax liability at the end of the year.
As the owner of an S-Corp, you are not liable to pay self employment tax. Self employment tax is the Social Security and Medicare portion of taxes that solopreneurs and the self-employed have to pay for themselves. If is the equivalent to the Social Security and Medicare withheld from your paycheck and paid on your behalf if you were on payroll.
Now if your business is already an LLC, you can be taxed as an S-Corp. This means that a simple form can be filed with your tax return to make this election. If you started your business in the current year then the due date to file this election to file this election for that year is 2.5 months after the date you set up the business. If you started your business in previous year then the due date was March 15th of the current year. This means if you file it now, if won’t be effective until Jan 1 2017. If your 2015 is on extension, you may have until the extended due date. I would consult with your tax accountant to determine which option most benefits your organization.