LLC and S-Corp: What’s Best for Your Business
In the realm of business structures, the debate between LLCs and S-Corps has sparked considerable chatter and confusion among entrepreneurs and business owners alike. Whether it’s seasoned companies reevaluating their structure or new ventures deliberating their initial setup, the decision between maintaining LLC status or transitioning to an S-Corp has significant implications for taxation, liability, and overall business operations. In this guide, SMB Partner & CPA Jacob Sanders takes us through a few questions to consider. We’ll navigate through the intricacies of this debate, offering clarity on key considerations to help businesses make informed decisions about their organizational structure.
The vast majority of businesses in our area are formed as an LLC under Missouri state law. As an LLC, you can be taxed one of four ways. You can either be a disregarded entity, a partnership, an S Corporation, or a C Corporation. When an LLC has more than one owner, the decision typically comes down to either being taxed as a partnership or an S-Corporation. This is a decision that shouldn’t be taken lightly as it could have major tax ramifications immediately or in the future. Here are some of the items you should consider in making this decision:
- How is your business funded?
- Many start-up companies are largely funded by debt at the onset and may not show profit for multiple years. If this is the case, you may not want to rush to make an S-Election since you won’t get basis for that debt. As a partner in a partnership, you get to count your share of the company’s debt as basis in your partnership interest which allows you to deduct losses that may not be otherwise deductible to an S-Corp shareholder in the same situation.
- How do you want to pay yourself and do you have other employees?
- As an S-Corporation, you are required to pay yourself a salary and it must be deemed “reasonable”. This topic is an entire can of worms in itself but the main point here is that if you don’t have any other employees, do you want to tie yourself down to filing quarterly and annual payroll reports just for your own payroll?
- Is the SE savings you will experience as an S-Corporation better than what you are giving up with QBID?
- The Qualified Business Income Deduction is a deduction whereby you can deduct up to 20% of your business income if you meet certain requirements. However, you don’t get this deduction on income from your wages from the S-Corporation. That means that your overall tax bill could be higher as an S-Corporation due to the loss of this deduction.
- How flexible do you need to be?
- Partnerships allow much more flexibility in various income and asset allocations. For example, in an S-Corporation, all profits distributions must be done according to ownership so if you want to distribute profits in any other ratio then you would need to do them as wages. You do not have this issue with partnerships.
- What assets does the company own?
- The general rule of thumb is that you don’t want appreciating assets, such as real estate, owned by an S-Corporation.
If you are unsure of how you should structure your business please reach out. We would love to help you. Give us a call (417) 408-8822.
Jacob Sanders, Partner & CPA