Business owners can achieve huge savings by navigating the LLC vs S corporation option.
S. Corp VS LLC: What You Need to Know
When running a business, your financial data can be critical in providing information that will help you to make smart decisions on a monthly, quarterly, and annual basis. Today, savvy business owners are using cloud accounting to provide accurate bookkeeping and tax savings that help their companies operate efficiently and profitably. Your cloud CFO can provide important information about when to consider electing S corporation status, even when your entity is legally a partnership or LLC.
LLC: Legal Protection & Pass-through Tax Treatment
A limited liability company, or LLC, is a pass-through entity. This means that the income and losses from businesses pass through to owners of the company on their personal tax returns. The limited liability formation is beneficial because it allows business owners to shelter their personal assets from the business’ indebtedness. In general, they are only liable up to the amount they have personally invested in the company.
Forming an LLC is a relatively easy and inexpensive process for a new business. Owners of LLCs can benefit from electing to be taxed as an S corporation while still maintaining the LLC structure. Your accountant can provide more information about the benefits of this special tax designation.
Benefits of S. Corporation
An S. Corporation offers benefits similar to the LLC but with a few additional features. Owners still shelter their personal assets from indebtedness resulting from the business. However, they are also permitted to take a salary, like any other employee, as well as dividends from the business. Both the salary and dividends are taxed at the lower personal tax level and are not subject to self-employment tax.
These entities do not pay corporate taxes because income passes through to the owner’s personal returns. Salaries taken must be “reasonable.” In other words, they must be in line with market standards. Business profits can then be distributed as dividends.
While S. Corporation status can mean huge savings for you as a business owner, the business should be in a predictable revenue and profit scenario to make sure the benefits can be realized.
Determining the Needs of Your Business
Every business has its own unique challenges. If you want to ensure the best chance for long-term success for your business, you should take advantage of the many opportunities that technology now offers. Your outsourced CFO can provide the data needed to determine the best legal and tax status for your company’s needs.
The advice you receive will help you to create a sound financial strategy to ensure success over the long term. A good working relationship with your cloud CPA offers individualized attention and a thorough understanding of the issues related to your specific business.
Are you lacking the financial data needed to make a decision about S Corporation tax status?
Schedule a consultation with us and we can help you make sense of your financial data.