When registering your business, deciding whether to choose LLC status or to be classified as an S Corp can have far-reaching implications for taxation and liability. If you ultimately choose an LLC structure, it’s important to know that you can elect to have your LLC taxed as an S Corp instead of as a pass-through organization, should you choose.
This choice of tax classification will determine how the IRS treats your business for federal income tax purposes. Opting to have your LLC taxed as an S Corp can offer several benefits.
Simplified tax reporting
Businesses that elect S Corp status can simplify their tax reporting obligations by avoiding the double taxation typically associated with regular corporations. Only wages paid to employees are taxed at the individual level, while the remaining profits can be distributed to shareholders as dividends which are taxed at the individual shareholder’s tax rate. This means that S Corps do not pay federal income tax at the corporate level, unlike C Corporations where profits are taxed both at the corporate level and again when distributed to shareholders as dividends.
Loss deductions
When classified as an S Corp, shareholders can deduct their share of the company’s losses on their personal tax returns. This can be particularly advantageous for small businesses in their early stages or those facing temporary setbacks. These losses can offset other income the shareholders may have, reducing their overall tax liability.
Self-employment tax relief
Since S Corp owners must pay themselves a salary, they can avoid paying the FICA taxes on the portion of their income designated as distributions. By splitting their income between salary and distributions, S Corp owners can potentially save on self-employment taxes as only the salary portion is subject to FICA taxes like Social Security and Medicare. This can result in significant savings for business owners, especially those with higher incomes.
When registering a business, seeking legal guidance can help determine the most suitable tax classification based on the specific circumstances and goals of the business owners. As such, if you haven’t received personalized feedback yet, consider reaching out in ways that will allow you to make truly informed decisions about your options.
