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Many of our Member households have a side-business or one partner who runs their own business. We’re all entrepreneurs on some level. One of the decisions people have to make along the way is how to register their small business (if at all). The main two options would be to register as an LLC or S-Corp. Here’s a breakdown of how we think about it.
There are differences between the two, but at the most basic level, this comes down to taxes. An LLC, when changed to an S-Corp doesn’t change the entity, just how the IRS classifies it.
If you register your business as an LLC (Limited Liability Company), the benefits are…
- Flexibility. LLCs may give you more flexibility in management and the way you handle profits.
- Taxes. LLCs enjoy pass-through taxation, meaning the business income passes through to your personal tax return, sidestepping the double taxation bullet. You simply pay self-employment tax on the new profit of the entity.
- Less Paperwork. Generally, LLCs face fewer regulations and paperwork than S-Corps, making them a lean choice for entrepreneurs who'd rather focus on their business than on red tape.
If you register your business as an S-Corp (Subchapter S Corporation), the benefits are…
- Taxes. S-Corps also avoid double taxation, but here's the kicker: they can offer savings on self-employment taxes, which can be a game-changer for some.
- Salary and Dividend Payments. This is related to the tax note above. As an S-Corp, you can pay yourself a salary and take additional profit distributions, which can be taxed more favorably. This also allows you to set up a Solo 401k (see below).
- Credibility. Some argue that being an S-Corp adds a layer of credibility to your business, which might be beneficial in certain industries.
- Solo 401k. As with an LLC, with an S Corp you can set up a solo 401k, and contribute to that personally. With an S Corp, “the company” can also match your personal contributions, up to 25% of your W2 income, which is tax deductible for the employer. Your personal contributions to that 401k reduce the amount of taxable income—and help you save for retirement.
As a general rule, if your small business’s gross revenues are in the $100k/$200k range, or above, you might want to consider S Corp status and explore the tax benefits of taking a salary and setting up a solo 401k. But also consider your business goals, financial needs, and how hands-on you want to be with paperwork—as an S Corp comes with more of that. Also, look into your state’s specific rules in regards to each type of entity, as they tend to vary.
If you’re on the fence about which option is right for you—and what the financial implications would be—the Range team is here to help evaluate your options.
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