If your small business is thriving, you’re probably wincing come tax time. Did you know you can reap many tax benefits if you set up your business as either an LLC or an S Corporation? Read on to find out what these benefits are, and how you can take advantage of them.
Benefits of the S Corp
One of the big reasons people decide to incorporate is that doing so protects their personal assets from liability. That means the company — rather than you as an individual — is responsible for liabilities brought against it through legal action.
Operating as a corporation — specifically an S Corp — helps you “pass through” losses to individuals on tax forms. So you as the owner can claim your corporation’s expenses to offset your income and reduce your tax liability while avoiding double taxation.
How this works is: an S Corp isn’t taxed as a separate entity from you as the owner or from shareholders. You simply file your personal income taxes as always, reporting the profits and losses on your tax return, the same way you would with a partnership. If you have more than one owner, each will be taxed based on the percentage of their ownership.
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Note, however, that this isn’t possible to do with an S Corp when it comes to increasing pass-through losses in real estate (it is with LLCs, though so keep reading).
If you set yourself up as an employee and issue yourself a paycheck, the corporation will pay payroll taxes on your income. You can also set yourself up to receive dividends, which are taxed at a lower rate.
Additionally, because of that pass-through tax, your S Corp isn’t required to pay corporate income tax, the way other types of corporations are.
If you’re interested in setting up your business as an S Corp, be aware that March 15 is the deadline to apply to be one if you want to file as an S Corp for 2012 taxes. Also note that there are limits on the number of owners of an S Corp, so if you exceed that number, you might be better off with an LLC.
Benefits of the LLC
With an LLC, your personal assets are protected, just as they are with an S Corp. In addition to having fewer hoops to jump through than a corporation, the LLC also provides for pass-through taxation, just as the S Corp does. Because the IRS considers the LLC a “disregarded entity,” you don’t file separate taxes for your LLC than for yourself personally. And if you’re in real estate, you can increase pass-through losses, whereas you couldn’t with the S Corp.
With an LLC, you have more flexibility in how you’re taxed. You can be taxed as a:
- Sole Proprietor
If you’re not sure which is best for your LLC, speak to your accountant to get advice. It will also depend on how many members/owners you have. If you’re the only owner, you can take distributions on the profit, which may be taxed at a lower tax bracket. Many foreign business owners prefer the LLC because it allows anyone to be the owner, such as another LLC, a trust, an estate, or a C or S Corp.
Many believe that LLCs find an easier time deducting expenses than other types of business structures, or even sole proprietorships. That includes home office deductions, which can further reduce your taxable income.
Which to Choose?
There are myriad reasons for choosing an LLC or S-Corp as a business structure, taxes being just one. Both protect your personal assets from liability, so it’s wise to choose either one, depending on your company’s needs. Determine the best structure for your business and start benefiting from lower taxes!