LLC vs. S Corporation: Which Offers Greater Tax Savings?

Selecting the right business structure is crucial, as it can significantly impact your tax obligations. Below is a comparison of two popular choices for small business owners: LLCs and S Corporations.

LLC (Limited Liability Company)

• Typically taxed as a sole proprietorship (for single-member LLCs) or a partnership (for multi-member LLCs).
• Offers a simple structure with minimal formalities.
• Business profits are taxed at the owner’s personal income tax rates.
• Profits are subject to self-employment tax of 15.3%.

S Corporation

• A pass-through entity similar to an LLC, but allows owners to pay themselves a reasonable salary through payroll.
• Remaining profits can be distributed as dividends, which are not subject to self-employment tax.
• Requires setting up payroll and filing additional IRS paperwork.

Which Structure Saves More on Taxes?

If your business earns substantial profits, electing S Corporation status may reduce your self-employment tax burden by splitting income between salary and dividends. However, this tax advantage comes with increased administrative responsibilities and compliance requirements.