Invariably “LLC or S-corp?” is one of the most frequent questions asked during my office hours. The debate used to be C-corp vs S-corp but in the last ten years the question has become a more difficult one LLC or S-corp?
Ask any lawyer and they are just going to be happy that you are incorporating and creating that legal buffer to limit your liability to what you have invested in the company.
Ask any tax person and here we go off to the races…. but let’s try to break it down a little.
The complicating part of the question is that there are really two decisions to make (if you pick an LLC):
1) How do you want to be legally structured
2) How do you want to be taxed
So how you want to be legally structured?
It seems most new companies are getting set up as an LLC for lots of reasons – they tend to have less restrictions than s-corps, the legal documentation required is different but some think it is easier, LLCs are way more flexible and allow for almost any income sharing option you can dream of.
There are good reasons for both so best of luck, but you aren’t finished yet…
How do you want to be taxed?
Why after already making the legal decision do we have to make a tax decision?
Well you don’t if you chose S-corp as your legal entity – you are done you file your taxes as an S-corp, Form 1120-S for those playing the tax form game at home.
However, if you chose to legally incorporate as an LLC, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return. Seriously? Yes – the IRS didn’t add any forms when the states created LLCs so it gives you options how to file your taxes when you are an LLC. Now all I ask is that you remember back to why you chose to be an LLC when you originally formed. Were there specific reasons why you didn’t choose the S-corp structure? Does electing being an S-corp for tax mess that up?
Almost every tax person is pushing every LLC owners to elect S-corporation status to take advantage of a 2% savings currently available on self-employment tax. If that 2% is meaningful then by all means take it, IF and I mean IF there wasn’t a reason you picked LLC over S-corp when you incorporated. Also the 2% savings isn’t without risk, that is a totally separate blog post though.
If I have totally confused you and don’t know what you are any more, you can always check to see what tax filings you made:
S-corp files 1120-S
LLC with one owner – files on Schedule C on your personal return
LLC (with a corporation / an S-Corp tax election) files an 1120-S
LLC (with a partnership election) files a 1065
If you haven’t decided yet and want and you are at your wits end and just want my advice knowing nothing about your company – go LLC taxed as a partnership. It gives you the most flexibility to make changes down the road when you will have a good reason to choose one over the other.