Did you start your business as an LLC, but you keep hearing that you should convert your business to an S Corp? Here’s what you should consider before making that change.

What is an LLC?

LLC stands for Limited Liability Company, a specific legal entity used to start a business. An LLC offers a business owner protection from personal liability should personal debts or other financial obligations interfere with company operations.

LLCs are common among new businesses as they offer similar liability protection to a corporation; however, their differences lie in the ease of establishing an LLC. LLCs face fewer restrictions than an S Corp. They are not subject to the IRS’ regulations regarding the amount and type of shareholders; and are not contingent on federal and state rulings regarding governance, procedure, and distribution of funds, allowing the owner to divvy the company’s profits and losses in whatever fashion they choose.

The bottom line is that legal claims for the owner’s assets cannot be held against the business. Aka, creditors cannot go after your assets as the LLC protects you against personal liability.

What is an S corporation (S Corp)?

Commonly referred to as an S subchapter, an S Corp is a business structure permitted by the Internal Revenue Service to allow for a more streamlined tax filing system. How is this done? S Corps can pass a business’s taxable income, deductions, credits, and any losses directly to the company’s shareholders. This ability gives it a leg up over its counterpart, the C Corp, since it is only available to small businesses with one hundred or fewer shareholders, providing companies an ideal alternative to an LLC.

Is it Better to Have an S Corporation or LLC as a Business Structure?

Small businesses run by a single owner and sole proprietors typically prefer an LLC over an S Corp as it’s often the easiest and most cost-effective way to incorporate. In addition, LLCs are better suited for owners who primarily concern themselves with how flexible day-to-day management is.

On the other hand, if you’re now generation more income, running a larger operation with more moving parts, want the most out of asset protection, plan on receiving considerable investments from entities outside of your shareholders or intend on becoming a publicly-traded corporation and selling common stock, the S Corp tax election serves you best.

What’s important to know is that the S Corp designation is a strategic tax decision made so businesses can begin as a different business entity (LLC or sole proprietorship) and receive the S Corps taxation benefits.

Therefore, selecting the proper business structure for your company boils down to its size and scale. Some factors to consider are how many employees you have, your level of involvement, and your tax preferences. While it’s true that large-scale companies are subject to fewer taxes, they are costly to start and upkeep, requiring a plethora of professional services, generally accountants and lawyers.

While it’s always possible to change your business’s formation should your needs demand it, this often comes at the cost of a tax penalty. So, it’s in your best interest to determine the business formation which aligns with your ideals and stick to it.

S-Corp vs. LLC Corporate Income Tax Benefits

When it comes to tax season, LLCs and S corporations allow a business owner to go through “pass-through taxation.” Pass-through taxation permits the business’s income (and losses) to hold a record and be taxed on the part of the owner’s personal tax return. This is made possible since they are classified as “pass-through entities,” meaning they do not pay corporate tax; instead, they pay their shareholders, who claim responsibility for due taxes.

Although S corporations also protect the business owner’s personal assets from corporate liability—commonly through dividends to mitigate double personal and corporate taxation— S corporations also assist companies in establishing higher credibility. This perk is the result of an S Corps greater oversight.

And while mainly remaining exempt from corporate taxes, the IRS requires S Corps to file tax returns and report their earnings to the federal government.

How Collective Can Help Your Business

Collective is a huge fan of S Corps. Why? Because structuring your business this way can significantly impact how much taxes you pay. For the majority of self-employed entrepreneurs out there, forming an S Corp could be the difference between saving and overspending on taxes. 

As a Collective member, you will receive an exclusive accounting team and software to monitor and control your financial data. And they’ll help you set up or convert your business into a legal S Corps.

Looking for someone to handle your corporation’s taxes for you? Visit our partner, Collective, to learn more.

Why Choose an S Corporation?

With an S corporation, the business owner can protect their personal assets from any legal or financial issues that may arise in the company. Additionally, it offers substantial tax savings as income passed through to owners is taxed at a personal rate rather than corporate taxes. Therefore, this structure has clear advantages for business owners who want to reduce their overall tax burden and secure their finances against creditors.

If you want to create a company that multiple people can run and benefit from, an S corporation is far superior to an LLC due to the greater oversight of a board of directors. Furthermore, with members able to become employees as well, this structure allows for cash dividends from company profits - making it both practical and rewarding!

Should You Make Your Company an LLC or an S Corporation?

As a sole proprietor, establishing an LLC is often the best-recommended course of action since it allows for separation between business assets and personal ones. However, that option remains open if you wish to change your company’s structure or form a new S corporation.

The Bottom Line

The S Corporation structure offers business owners significant tax savings and liability protection. Whether you’re looking to start a new S Corp or switch from an LLC, Collective can help make the process easier with its exclusive accounting team and software. With their assistance, you can maximize your company’s potential while taking advantage of all the benefits S Corps offers. Visit Collective today to learn more about how they can help take your business formation plan to the next level!

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