LLC vs. S Corp: Which is the Best Entity for Your Business?

:sparkles:LLCs provide limited liability protection, while S Corps offer similar protection plus potential tax advantages.

:chart_with_upwards_trend:By electing S Corp status, business owners can split their income into distributions and salaries, potentially reducing self-employment taxes.

:briefcase:LLCs offer more flexibility in ownership and management, while S Corps have more rigid requirements for shareholders and officers.

:calendar:LLCs have fewer ongoing requirements compared to S Corps, which have strict rules for meetings and record-keeping.

:money_with_wings:Passive business owners in manager-managed LLCs and rental activities can often avoid self-employment taxes altogether.

What is the main difference between an LLC and an S Corp?

—The main difference lies in the taxation and requirements. LLCs provide limited liability protection and pass-through taxation, while S Corps offer potential tax advantages but have stricter rules and ongoing requirements.

Can an LLC elect to be taxed as an S Corp?

—Yes, an LLC can choose to be taxed as an S Corp by filing Form 2553 with the IRS. This option allows business owners to potentially reduce self-employment taxes by splitting income into distributions and salaries.

Which entity is better for reducing self-employment taxes?

—For active business owners, electing S Corp status can help reduce self-employment taxes by paying salaries and avoiding taxes on distributions. Passive business owners in manager-managed LLCs and rental activities can often avoid self-employment taxes altogether.

What are the ongoing requirements for an S Corp?

—S Corps have more significant ongoing requirements compared to LLCs. Some of these requirements include holding annual director meetings, issuing stock, and maintaining corporate records and meeting minutes.

Which entity is best for new businesses?

—The best entity choice for a new business depends on several factors, including the owner's goals, financial situation, and planned business activities. It's recommended to consult with a tax professional to determine the best fit for your specific circumstances.

00:00Introduction to the importance of entity selection and the potential tax savings involved.

01:19Comparison of LLCs and S Corps, including liability protection and taxation differences.

06:16Explanation of self-employment taxes and the potential tax advantages of electing S Corp status.

08:32Discussion of ownership, management, and ongoing requirements for LLCs and S Corps.

10:58Exploration of strategies to reduce self-employment taxes, including passive business ownership.