LLC v. S-Corp

LLC v. S-Corp

We get a lot of clients who come to us to form an “S Corporation.” They are often surprised to hear that there is no such thing as forming an S Corporation, also called an S Corp, in Florida. An S Corp is an election by a small business to be taxed under the IRS Subchapter S code. An LLC or a C Corporation can choose to elect to be taxed as an S Corp.

When you form an LLC, the LLC is taxed as a “pass-through” entity by the IRS. Meaning that it’s as if the IRS doesn’t recognize the difference between you and your company. Your LLC does not pay any federal income tax, but the profits and losses are passed through directly to the owner’s personal income. The owner then pays federal income tax and the net earnings of the LLC are subject to a 15.3% self-employment tax. You would pay your taxes just like every year, except now you will also have some business deductions. See our article on Best Bookkeeping software for new businesses.

If you choose to elect to be taxed as an S Corp, the profits and losses also pass through to the owners personal income but the net earning of the LLC are not subject to the 15.3% self-employment tax. The IRS does require the owner to be an employee of the LLC and pay the owner a reasonable salary. This also means that now the LLC has to perform employee compliance paperwork and pay payroll taxes.

For single-member LLCs, we generally do not recommend electing S Corp tax status. It just does not make sense until your business is making significant profits and you can pay yourself a reasonable salary. You can always elect to be taxed as an S Corporation later on.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.

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FL Patel Law PLLC is a boutique business law firm dedicated to entrepreneurs and companies.

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