I own a small business and I am confused. Which would be best for my company?

Here are some things to consider:

LLCs can have an unlimited number of members; S corps can have no more than 100 shareholders (owners). Non-U.S. citizens/residents can be members of LLCs; S corps may not have non-U.S. citizens/residents as shareholders. S corporations cannot be owned by corporations, LLCs, partnerships, or many trusts.

My brothers and I share ownership of our company. We have 15 part time and 4 full time employees. Which is better for us?

If there will be multiple people involved in running the company, an S Corp would be better than an LLC since there would be oversight via the board of directors. Also, members can be employees, and an S corp allows the members to receive cash dividends from company profits, which can be a great employee perk.

Will I save money as an S corp? The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. An LLC taxed as S corp offers benefits of a corporation while also providing flexibility on income treatment.

What are the taxes associated with and LLC vs. and S corp? As an LLC, your business will have to pay an $800 annual minimum tax with a $6,000 LLC fee totaling $6,800. Meanwhile, an S Corp will only pay $2,250 of S Corp tax based on the 1.5% tax rate. Choosing to be an S Corp can provide tax savings to the owners for self-employment tax purposes.

Tax planning for Small Business

How do I pay taxes as an S corp? S corps are required to pay quarterly income taxes via an IRS Form 941 to report the aggregate amount it withholds and needs to send to the IRS. The form is due four times a year.

When should my small business convert from an LLC to an S corp? From a tax perspective, it makes sense to convert an LLC into an S corp, when the self-employment tax exceeds the tax burden faced by the S corp. In general, with around $40,000 net income you should consider converting to S corp.

Should I pay myself a salary as part of an S corp? You are required to pay yourself a reasonable salary as an S corp owner, which means at least what other businesses pay for similar services. If you don’t, you open yourself up to potential IRS scrutiny, penalties, and interest.

I want to move to an S corp. What is the deadline for 2023? To be considered an S corporation for tax purposes in all of 2022, existing LLCs and C corporations that follow a January 1–December 31 tax year had to submit an IRS Form 2553 by March 15, 2022 (two months and 15 days after the start of the 2022 tax year). For 2023, you need to submit an IRS Form 2553 by March 15, 2023.

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Maribeth Christensen, CPA and her team are here to help you navigate the best tax planning strategies for your small business. Give us a call today (919) 844-6111