As a small business owner, you might be wondering, "Do I need an LLC?" or "What’s the difference between an LLC and a corporation?" These are common questions we get from clients all the time. With so many options—LLCs, S-corps, and corporations—it can feel overwhelming to make the right choice.
We want you to be informed when making your decision. Below, we’ll break down the differences between LLCs, S-corps, and C-corporations and explain how they impact your personal liability, taxes, and how you run your business.
Do you have questions about forming an LLC or corporation? Read this blog then create your LLC or corporation online.
Overview of Business Structures
An LLC, or Limited Liability Company, is a business structure that's separate from the owner(s). Forming an LLC could protect the owners' personal assets - but we're focusing on the tax side, so consult with an attorney on legalities. LLC owners are called members, and you can have as many members as you’d like. In most states, an LLC must be renewed annually to remain compliant.
Business Tip: Make sure to keep your business finances separate from your personal transactions. Mixing them, called "piercing the corporate veil," could result in losing your personal liability protection. If that happens and your business gets sued, your personal assets - like your house or car could be at risk.
LLC Default Tax Classification
If you’re a single-member LLC, the IRS will tax you as a sole proprietorship by default. That means your business profits or losses will be reported on your personal tax return using Schedule C, and you’ll pay self-employment taxes on your business income.
For multi-member LLCs, the default IRS tax classification is a partnership. This requires you to file Form 1065 (U.S. Return of Partnership Income) to report the total income for the LLC. Each member will also receive a Schedule K-1, which details their individual shares of income, deductions, and credits to file with their personal tax returns. Members pay self-employment tax on their share of the earnings.
Keep in mind that electing to be taxed as a different entity type does not mean you lose your LLC status - this is how the IRS recognizes your business since they don't recognize LLCs for tax purposes.
Alternate Tax Elections
A single-member LLC can also choose to be taxed as an S-corporation for added tax benefits. With S-corporation status the LLC members work FOR the S-corporation therefore owners get paid wages. When you're paid wages, you're not self-employed so you don't pay self-employment taxes like you'll pay being if you elect the IRS default tax classifications. Any distributions outside of wages, however, you will have to pay tax on.
You can also choose to be taxed as a C-corporation. C-corporations are subject to double taxation because the business profits are taxed at the corporate level and those same profits are taxed again when paid to shareholders. Some think a C-corp is reserved for large, publicly traded organizations and in some cases, depending on the goals, it could make sense for your business.
Do You Need an LLC? Other Things to Consider
If you choose to form an LLC, you'll need to appoint a registered agent. A registered agent, also called a statutory agent, is a person or business that's receives legal documents on behalf of your business. If your business is served with legal papers or if you need to renew your entity with your state, your registered agent will receive these documents and forward them to you. Your registered agent must have a physical business or residential address in the state where your business will be registered.
Depending on your state, you may have the option to serve as your own registered agent. If you choose to be your own registered agent, note that your physical address will become part of your Secretary of State's public records. If you run your business from your home, that means your home address will be published. You cannot use a P.O. Box for your registered agent's address.
Bonus: When you form your entity with us, you’ll receive free registered agent services for one year. We’ll handle the legal paperwork and ensure your compliance requirements are met, so you can focus on running your business without worrying about publishing your home address.
Making the Right Choice
Forming an LLC is an important step in protecting your personal assets while structuring your business for growth. From tax classifications to registered agent services, there’s a lot to consider. That’s why we’re here to help guide you through the process.
Ready to form your LLC or corporation? Book a consultation with Winston CPA Group today, and let’s get started on building a strong foundation for your business.
Frequently Asked Questions (FAQ)
Q: Do I need an LLC if I'm the only owner?
A: Yes, even as a single owner, an LLC can protect your personal assets from business liabilities. Plus, you have flexibility with how your business is taxed.
Q: What's the difference between an LLC and a corporation?
A: The primary difference is how they’re taxed and how much personal liability protection they offer. LLCs are more flexible and can choose how they’re taxed, while corporations are more rigid but can provide added benefits for large companies.
Q: Is it better to be taxed as an S-corp or stay as an LLC?
A: It depends on your business goals and income. S-corps can provide tax benefits by allowing you to avoid self-employment taxes on wages, but they also come with additional requirements and administrative work.
Q: What’s a registered agent, and do I need one?
A: A registered agent is required for an LLC. This is the person or business responsible for receiving legal documents on behalf of your LLC. You can be your own registered agent, but it comes with privacy concerns if you operate from your home.
Q: Can I switch my tax classification later if I change my mind?
A: Yes, LLCs have flexibility to change their tax classification. You can elect to be taxed as an S-corp or C-corp if it benefits your business later on.
Comments