Table of Contents
Choosing between an S Corporation (S Corp) and a Limited Liability Company (LLC) involves understanding their tax differences. Both structures offer liability protection, but their tax treatment can vary significantly. This article highlights key tax distinctions to help you make an informed decision.
Taxation of Income
An LLC is typically taxed as a pass-through entity, meaning profits and losses are reported on the owners’ personal tax returns. By default, a single-member LLC is taxed as a sole proprietorship, while a multi-member LLC is taxed as a partnership. An S Corp also passes income directly to shareholders, avoiding double taxation, but with specific restrictions.
Self-Employment Taxes
One major difference is how self-employment taxes are applied. LLC members generally pay self-employment taxes on all profits. In contrast, S Corp shareholders who work as employees pay themselves a reasonable salary, which is subject to payroll taxes. Remaining profits are distributed as dividends, which are not subject to self-employment taxes.
Tax Filing Requirements
LLCs file informational returns using Schedule C (for sole proprietors) or Schedule K-1 (for partnerships). S Corps file Form 1120S, which reports income, deductions, and distributions. Shareholders receive Schedule K-1s to report their share of income on personal returns.
Summary of Key Differences
- Taxation method: Pass-through for both, but S Corps can split salary and dividends.
- Self-employment taxes: LLC members pay on all profits; S Corp shareholders pay payroll taxes on salary only.
- Filing forms: LLCs use Schedule C or K-1; S Corps file Form 1120S.