When it comes to tax matters, most people find the intricacies very confusing. This is particularly true when the issue involves the LLC vs. the S-Corp. The best thing to do in cases like this would be to consult a tax expert to put the individual right. Still, it makes a lot of sense for the businessman or woman to know one or two thing about self-employment tax. It would also help to distinguish clearly between the LLC vs. S-Corp and know the tax implications of each one.
In very simple terms, the LLC stands for Limited Liability Corporation. This is a form of business in which the owner has limited liability. This means that in case the business goes under, the business owner cannot be held liable for debts incurred by the business. On the other hand, the S-Corp is a form of corporation with 75 or fewer shareholders. The S-Corp enjoys the benefits of incorporation but it is taxed by the IRS as if it were a partnership. With this definition in mind, the business owner can now choose either the LLC or the S-Corp classification for the purpose of taxation. It has to be pointed out that each one has its pros and cons.
The beauty of the S-Corp is that the business owner will not have to pay corporate taxes. Under this classification, the business owner only pays taxes as an individual and not as a corporation. Unfortunately, this can be a problem in the sense that it may lead to double taxation in some cases. Again, the business owner will also have to file tax returns every year even without paying corporate taxes.
For the LLC classification, only corporate taxes are paid. Thus, the incidence of double taxation is almost non-existent under this classification. Yet, it has to be pointed out that tax matters are very tricky. In some cases, there are no clear cut LLC vs. S-Corp guidelines available to the business man or woman as the two different tax classifications can overlap. Therefore, the best thing to do would be to consult an expert so that one does not run foul of the law without intending to do so.