S Corp vs LLC: Which is better for a small business?

Choosing the right business structure is one of the most important decisions for any small business owner. Two of the most common options are S Corporations (S Corps) and Limited Liability Companies (LLCs), but while both offer benefits, the best choice depends on your goals, tax strategy, and future plans.

So, what is better for your small business: LLC or corporation? Let’s break it down.

What is an LLC?

An LLC is a flexible business structure that protects its owners (called members) from personal liability. If the business has debts or legal issues, your and your fellow members' personal assets are generally safe. LLCs can have one or multiple members.

By default, LLCs are taxed as “pass-through entities,” meaning profits and losses pass through to the owners' personal tax returns.

What is an S Corp?

An S Corp is a special tax designation available to eligible businesses. Like an LLC, it provides liability protection and potential tax advantages.

In terms of ownership, S Corps have restrictions; only US citizens or residents can own shares, and there can be no more than 100 shareholders.

S Corps also pass profits and losses to owners, but they offer unique tax-saving opportunities for small businesses.

S Corp vs LLC: Taxes

When choosing between the two, taxation is one of the biggest factors you should consider. Here’s why:

LLC taxes

By default, an LLC is taxed as a sole proprietorship (for single-member LLCs) or a partnership (for multi-member LLCs).

LLC members pay self-employment taxes (15.3%) on all business income because they’re considered self-employed.

Tax and Compliance —

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S Corp taxes

Conversely, an S Corp can provide significant tax advantages over an LLC. This is because owners (i.e., shareholders) can take a reasonable salary as employees, and distribute the remaining profits as dividends.

These dividends are not subject to self-employment taxes, which can save thousands in taxes annually (although if you attempt to abuse this system you will likely incur audits and potentially penalties).

Example: If your business makes $100,000 of profit and you pay yourself a salary of $60,000, the remaining $40,000 can be distributed as dividends — saving on self-employment tax. However, that salary of $60,000 should be justifiable.

How to choose between the two

When choosing between an LLC and an S Corp, consider these questions:

• How much profit do you make? S Corps are more tax-efficient at higher income levels.

• Do you want flexibility? LLCs are less restrictive and require less paperwork.

• Are you ready for payroll? S Corps require paying yourself a salary, which means additional admin work.

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When is an S Corp preferable?

Some small businesses may choose S Corps for the following reasons:

• Tax savings. As mentioned, dividing your income between salary and dividends reduces self-employment taxes.

• Credibility: S Corps can appear more professional to banks and clients compared to LLCs.

• Perpetual existence. Unlike LLCs, which dissolve if a member leaves, S Corps continue to exist regardless of ownership changes.

When is an LLC preferable?

An LLC might be the better option if you value flexibility. This is because LLCs offer:

• Ease of setup: LLCs are simpler and cheaper to establish compared to S Corps.

• Fewer restrictions: There are no limits on ownership or shareholder types.

• Less paperwork: LLCs have fewer ongoing administrative requirements than S Corps.

Can you convert an LLC to an S Corp?

Yes, you can convert an LLC to an S Corp by filing Form 2553 with the IRS. Before you do, though, you should ensure that you have weighed up the pros and cons.

How can Remote help?

The process of choosing between an LLC and an S Corp depends on your priorities. If you want simplicity and flexibility, an LLC might be the best fit. But if you’re focused on tax savings and are willing to take on extra administrative work, an S Corp offers clear advantages.

This is where Remote can help. Our Payroll platform takes on that administrative work for you, making it quick and easy to ensure that you are fully compliant with all payroll tax and employment laws. We handle all the filing and reporting, leaving you to focus on running and growing your business — whichever model you choose.

Learn more about how Remote Payroll can make your life easier.

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