by: Patricia Jones CPA/ABV/CFF CFE
There are several choices in entity types when setting up a new business. Most businesses set up as either a Limited Liability Company or a Sub Chapter (Sub S) Corporation. If you set up as an LLC, you can elect to be treated as a Sub S Corporation for tax filing purposes.
The major advantage as a LLC is that you protect your personal assets from the creditors of your business. For a LLC, you normally would not be financially responsible for more than your investment in the company. For both LLCs and Sub S Corporations, you pay personal income tax, but not corporate tax.
Below are some noted differences between the two entities.
Limited Liability Company(LLC)
- If it is a single member LLC, owner does not have to file a separate business tax return for LLC. The business activity can be reported on their personal return.
- For an LLC, single members are required to pay self-employment tax on income which means making quarterly estimated tax payments to IRS.
- Business operations should always be in a separate bank account. Owners should keep the LLC separate from their personal assets and not mix funds. Do not want to lose the protection of an LLC by combining accounts.
Subchapter S Corporation(Sub S)
- Advantage of Sub S Corp is that the net income is not subject to self-employment tax.
- The Sub S Corp needs to pay reasonable salary to the officers. The reasonable salary should be tied to the industry standards. IRS is increasingly auditing businesses for this reason.
- Profits and losses must be distributed to the shareholders in proportion to their interest. For example, if shareholder has a 25% interest, the shareholder will report 25% of the net income or loss of the business on their personal tax return. If distributions are made, the shareholders must receive 25% of the distribution.
- Separate tax return must be filed for the Sub S corporation which is additional for accounting and tax preparation.
If you have questions or need help deciding, feel free to call Jones and Company CPAs P.A. at 727-845-4166 or visit onlinwww.jonescpas.com.