Should I be taxed as an LLC or an S Corporation?

Should I be taxed as an LLC or an S Corporation? 1

 

By Lindsey and Adam Nubern

 

DISCLAIMER: The information and materials we share in this article are intended for reference only.  As the information is designed solely to provide guidance to the readers, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations.  Therefore, we strongly encourage you to seek the advice of a professional to help you with your specific needs.

 

 

This question is asked a lot by new business owners. They’re shocked by the crazy high self-employment taxes after striking out on their own. Then, they start looking for ways to decrease their taxes and find articles about being taxed as either a Limited Liability Company (LLC) or an S Corporation (S Corp).

 

So, which one’s better: being taxed as an LLC or S Corp? Well, this isn’t the best question to be asking to find ways to save on your taxes.

 


The Reason It’s a Bad Question

 

Here’s why. The question comes from a misunderstanding.

 

The question is framed to make you believe an LLC and an S Corp are different entities you can choose from that will affect your taxes.

 

This is incorrect. An LLC is a form of business structure you can change with your state. By becoming an LLC, your new business structure doesn’t directly affect your taxes. However, by being structured as an LLC you are able to elect other tax classifications that may decrease your taxes. One of these options is to elect to be taxed as an S Corp.

 

The question is bad because you can be both at the same time. You can be structured as an LLC and taxed as an S Corp.


The Better Question to be Asking

 

If you’re on the hunt to find ways to save money on your taxes, the better question to ask in your research is, “What tax classification is most advantageous for my business?”

 

This LLC versus S Corps comparison is causing a lot of confusion for small business owners, so we want to help you on your journey of understanding LLCs and S Corps.

 

In this article, we’ll look at the path most folks have with taxes when starting a business out of their RV. We’ll also give a general overview for why someone may want to become an LLC and how becoming an LLC opens your options to elect different taxation classifications. We’ll also briefly chat about how and when it could make sense to elect be taxed as an S Corp.

 

Let’s get started.

 


The Basics of Taxation

 

For most folks starting a business out of an RV, it’s just you, one person, starting a business. With one owner running the business, the federal government recognizes and taxes you as a sole proprietor.

 

To complete your taxes as a sole proprietor, you report your business income and expenses on Schedule C and attach it to Form 1040 and submit these documents (along with others) to the federal government.

 

What surprises a lot of folks is sole proprietors have to pay self-employment taxes. For most people who were on salary and working for a company before, the company was paying a big portion of taxes for you. Now, as a self-employed person you have to cover all of the taxes yourself. Ouch!

 

This is a big surprise for most folks. And, this starts the journey where business owners begin researching how to save on taxes and find articles causing them to wonder if they should be taxed as an LLC or as an S Corp.

 


Choosing to be a Limited Liability Company (LLC)

 

Like we shared, an LLC is a business structure. Normally, choosing to become an LLC comes into play when you feel you need legal protection because the type of work you do. For example, if your business is dealing with clients’ personal financial information, you may want to get more legal protection for your business.

 

To do this, you’ll file Articles of Organization with your Secretary of State. Each state’s regulations and protections are different. If you have questions, you should connect with a lawyer in the specific state you are filing in. As a resource, Xscapers works with Loring and Associates for folks in Texas.

 


Becoming an LLC & How This Does/Doesn’t Affect Your Taxes

 

Okay, let’s say you’ve filed your Articles of Organization and now you’re an LLC. Even though you’ve changed to an LLC structure with your state, this doesn’t change how the federal government sees your business and taxes you. They’ll still tax you as a sole proprietor. By becoming a single member LLC (one owner LLC), you simply added protection for your company with your state. This doesn’t change your taxation. 

 

However, an LLC has more options of tax classifications that can be elected. Here’s where the LLC and the S Corp cross paths. An LLC may elect to be taxed as an S Corp. As an S Corp, you may have lower taxes. The change isn’t automatic, though, you have to file certain documents to change your tax classification.

 


How to Elect to Be Taxed as an S Corps

 

Like we shared, electing to be an S Corp may decrease your taxes.

 

However, you need to be an LLC first. Again, your decision to change your business to an LLC gives you options to elect other tax structures. One option is to elect to be taxed as an S Corp.

 

An LLC taxed as an S Corp is taxed by the IRS in an entirely different way than as a sole proprietor. Instead of filing Schedule C on your taxes as a sole proprietor, you’ll file Form 1120S.

 

To change your tax classification to be taxed as an S Corp, you’ll file Form 2553. You must file this form within a certain time period depending on your specific situation. You can see the instructions for Form 2553 here.

 

However, there are many requirements to be a LLC taxed as an S Corp. These include keeping Board Minutes, creating and maintaining an Accountable Plan, and paying yourself a reasonable salary.

 


When to Elect to be an S Corp?

 

A good rule of thumb: The tax savings benefits of electing to be an S Corp do not outweigh the requirement costs until you get to at least $30,000 of net income.

 

You can review the requirements to be an S Corp here.

 

This may or may not be the best decision for your business right now.

 


The Better Question to be Asking

 

Remember, if you’re on the hunt to find ways to save money on your taxes, the better question to ask in your research is, “What tax classification is most advantageous for my business?”

 


Still Have Questions about Your Unique Situation?

 

Everyone’s situation is different. You can ask questions and get clarity on ways to save on your taxes by connecting with a CPA.

 

Xscapers works with Adam Nubern of Nuventure CPA. You can send Adam a quick note here.

 

 

DISCLAIMER: The information and materials we share in this article are intended for reference only.  As the information is designed solely to provide guidance to the readers, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations.  Therefore, we strongly encourage you to seek the advice of a professional to help you with your specific needs.

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