If you’ve already put changing your business structure on your New Year’s Resolutions list for 2015, kudos to you. The right business structure can not only protect your personal assets but also give you some relief come tax time.
The two most popular business structures for small businesses — the LLC and the corporation (specifically the S Corp) — have some fantastic tax benefits. But which have the best benefits for your business?
The Perks of the LLC
LLCs have a few less rigid requirements than corporations, and don’t require having a Board of Directors. Taxwise, the LLC can be treated as a pass-through entity, which means rather than filing corporate taxes, you file your business profit and loss on your personal tax forms. Those business losses come in handy in reducing your taxable income. This is great for simplifying the amount of time you spend on your taxes!
And because LLC members aren’t considered employees, their share of the company profit is not subject to social security or Medicare tax. (Keep in mind you still need to pay self-employment taxes on your income.) On the other hand, a corporation requires shareholders to pay social security and Medicare taxes on their salaries.
Where Corporations Shine
S Corps are also taxed as pass-through entities, which is why they’re such popular business structures for small businesses. However, C Corps also offer tax benefits: where shareholders of S Corps and LLCs must pay taxes on their share of profits — whether that money goes in their pockets or stays in the business — C Corp owners are only taxed on the dividends they receive. It’s possible to structure your dividends so that you fall into a lower tax bracket (talk to a tax expert about this).
Even if your business isn’t an S Corp, it can elect “S corporation tax treatment” so that it can take advantage of that pass-through tax benefit. And where LLC and some S Corp shareholders have to pay tax on certain employee health benefits, employer contributions to HSAs or FSAs, and life insurance benefits, C Corp shareholders do not.
There’s no simple cut and dry answer to which business structure offers the best tax benefits. It really depends on what your specific business needs are. But do choose one! Both the corporation and LLC offer amazing benefits that your company will reap for years to come.