The legal structure of your business impacts everything from taxation and liability to investor appeal and administrative costs. Two of the most common structures, LLCs and S-Corps, offer distinct advantages depending on your goals. Understanding the differences helps you select the right fit from the start.
LLC (Limited Liability Company)
- Simple formation and maintenance
- Pass-through taxation by default (sole proprietor or partnership)
- Flexibility in profit distribution
- Members pay self-employment tax on all income
S-Corp (S Corporation)
- Must meet IRS eligibility requirements (U.S. citizens, 100-shareholder limit, single class of stock)
- Income passes through to shareholders
- Owners must pay themselves reasonable salaries (W-2) and may take additional distributions
- Distributions are not subject to self-employment tax, reducing overall tax liability
Factors to Consider When Choosing
- Your business’s current and projected income
- Whether you want to reinvest profits or distribute them
- Desired tax savings and payroll obligations
- State-level tax and filing requirements
- Growth plans and potential outside investors
Transitioning from LLC to S-Corp
- An LLC can elect S-Corp status by filing IRS Form 2553
- Be prepared for increased payroll and filing obligations
- May result in significant tax savings if structured correctly
Need help determining which entity is best for your business? We’ll walk you through the tax and legal implications. Contact us today.