Attorney

The advantage of an S Corp over an Llc

It goes without saying that the Llc is the media darling when it comes to selecting an entity for small businesses. In some cases, however, an Llc is at a disadvantage compared to an S Corporation.

Originating in the late 1970s in Wyoming, itsybitsy Liability associates have rise to loft heights. They are arguably the singular most beloved and most used entity for small company start ups. Why is this? Well, the Llc offers the tax advantages of a partnership along with the liability safety of a corporation. At the same time, the Llc does not want owners, known as members, to comply with the formalities of a corporation. In truth, said formalities are pretty simple, but there you are.

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So, is an Llc all the time the best selection for a small company just getting rolling? When it comes to legal issues, you should know there is never a situation where "always" is going to be appropriate. This case is no different, particularly if we are talking about a singular owner Llc.

States love to create revenue from company entities. To create an entity, you have to pay a fee. To keep it running each year, you have to pay a fee. To make any modifications to the structure, you have to pay a fee. You get the idea. In there haste to embrace the Llc, most states allow for a singular owner Llc. It sounds like a great entity opportunity until one gets colse to to paying taxes. Then the benefits of an Llc come into question.

A singular owner Llc runs into a unique quark in the world of taxation. Plainly put, the Irs does not identify the viability of singular owner Llcs for tax purposes. Instead, the branch Plainly treats these entities as sole proprietors. This means the owner must narrative the finances of the Llc on agenda C of his or her tax return. The owner also must pay the 15.3 percent self-employment tax on the full behalf of the Llc. Ouch!

For sole possession situations, the S corporation is ordinarily a best bet than the Llc for tax purposes. Yes, it requires you to comply with a few more corporate formalities, but this is hardly difficult since you are the only owner! In a tradeoff for a bit more work, you get a major tax break. You can avoid part of the self-employment tax from the revenue of the corporation by claiming part of them as a dividend instead of payroll.

How much can be claimed as a dividend? Well, the Irs expects you to take a reasonable wages from the company. Arguably, this is what others in your manufactures would be paying. Since that is a rather vague figure, a best approach is to sit down with your accountant and come to a decision what the two of you could expound if the Irs came a knok'n! Regardless, the avoidance of the 15.3 percent self-employment tax is a major benefit afforded by the S-corporation over the Llc.

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This post was written by: Franklin Manuel

Franklin Manuel is a professional blogger, web designer and front end web developer. Follow him on Twitter