When Does It Make Sense To File A Business As An S-corp?

On Behalf of Ezell Law Firm, LLC

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Sep 13, 2024

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Business Law

Starting a business in Louisiana involves many decisions, including how to structure the entity. Most small business owners choose to form a limited liability company (LLC). However, it can sometimes be an advantage to file as an S-corporation.

While both offer liability protection, they differ in taxation and ownership structure. Knowing when to choose one over the other can save you money and make your business easier to manage.

Tax benefits of an S-corporation

One of the main reasons to choose an S-corporation over an LLC is for tax savings. In an LLC, the profits get passed directly to the owners, who then pay self-employment taxes on their earnings. This can add up, especially if the business is doing well.

With an S-corporation, however, owners can pay themselves a salary and take the remaining profits as distributions. Only the salary is subject to self-employment taxes, while the distributions have a lower tax rate. This can reduce the overall tax burden for business owners who are earning a significant amount of money.

Ownership and management flexibility

While LLCs are great for small businesses with a limited number of owners, S-corporations allow for more structure and can be beneficial as the business grows. An S-corporation can have up to 100 shareholders, while an LLC typically only has its members as owners.

Additionally, an S-corporation must follow more formal management processes, including electing a board of directors and holding annual meetings. This may make sense for businesses that plan to expand or attract investors. Also, it can make it easier to pass on shares in a business to family members through estate planning.

When an LLC makes more sense

While there are benefits to an S-corporation, an LLC is often simpler and more cost-effective for small businesses or solo entrepreneurs. LLCs are easier to set up and require less paperwork to maintain. For business owners who want fewer formalities and aren’t looking for the tax savings of an S-corporation, an LLC may be the better option.

Forming the right business structure depends on your goals and how you want to manage your company. If you’re focusing on tax savings and rapid growth, an S-corporation could be a good fit. However, for smaller, simpler operations, an LLC often suffices.