The Truth About S-Corps
One common question people ask when they’re preparing to set up a business is how to structure their business entity. LLC? Corporation? Something else? It can be confusing and overwhelming when you’re just starting out, so we’re here to break it down for you (you will still need to consult with a professional to discuss your specific situation).
In particular, we’ll be addressing this frequently asked question: Should I structure my business as an LLC or an S-Corp? AND busting the myth that forming an S-Corp will always save you money.
Business Structure Overview
You’ve got several options when it comes to forming a business entity. Here are a few common options:
👉 Sole proprietorship: This is actually not an entity and it doesn’t offer protection of your personal assets. This is when you simply decided to start doing business! This may be OK for some types of businesses when they are just getting started, but if your goal is to have an actual business and not just a hobby, it’s best to form an actual business entity at some point to protect your personal assets - especially since the goal will hopefully be to build more assets!
👉 Partnership: If you’ve got a cofounder or two, you can form a partnership by just going into business together, or form another type, like an LLP (Limited Liability Partnership) or LP (Limited Partnership).
👉 LLC (Limited Liability Company): An LLC separates you as the business owner from your business in all the right ways. Namely, by separating your assets! By forming an LLC, you're protecting your personal assets in the event things go south. Profits and losses pass through to your personal income without facing corporate taxes. If you do this, make sure you are doing this before you form an LLC, and following these steps after you form the LLC. Most states now allow you to form an LLC online and it is a relatively quick process.
👉 Corporation: A C-Corp is a separate entity from its shareholders and therefore offers the most protection over shareholders’ personal assets.The corporation pays tax on its profits, and then the shareholders pay tax on their earnings (i.e., double taxation). An S-Corp, on the other hand, is a tax election and does not get taxed twice, because profits pass through to an owner’s personal income tax.
👉 Nonprofit: Nonprofits or 501(c)(3) corporations do work that benefits the public and are therefore tax exempt.
Will A S-Corp Election Save Me Money?
Many LLCs elect to be taxed as an S-Corp because it can save you money on taxes. While this is true in many cases, it’s not a guarantee. There are costs associated with maintaining an S-Corp (for instance, paying a payroll company, because you’ll be paying yourself a “reasonable salary” as the owner), so if your business doesn’t generate a certain amount of profit, the tax savings associated with the S-Corp election may not be enough to offset the costs of running the business if it’s set up as an S-Corp.
A tax professional can run scenarios with you to help you figure out whether an S-Corp election would be a smart business move or not. It’s important to realize that every business is different, and what works for one company may not work for yours. (And while we’re doling out warnings, definitely do NOT take advice from viral TikTok reels or IG posts from “business gurus” without a grain of salt.)
One Last Thing!
Here’s your friendly reminder that neither an LLC nor an S-Corp gives you “ownership” of your business name. If you want to protect your intellectual property, you need a trademark!
And if you’re wondering where to turn for advice and support, you should consult a CPA for all tax-related matters and a lawyer for establishing ownership and protecting your business.
Schedule a trademark consultation with Kelli to get ownership over your brand, or schedule a pick-my-legal brain call to get your other legal questions answered.