LLC VS S Corporation: Which One Should I Get?

Minnesota small businesses often wonder whether to form a Minnesota S-corporation or LLC. The answer isn’t simple. Here are some questions to consider:

How many owners will there be?

An S Corp may only have 100 owners. An LLC does not have this restriction.

Who will own the business?

An S Corp may only be owned by individuals, estates, certain trusts, and certain tax exempt organizations. Partnerships and C corporations cannot be owners. An LLC does not have this restriction.

How much money will the business earn?

If the business earns more than the fair market salary of the owner, the business may reduce its tax burden by being taxed as an S Corp. Of course, an LLC can be taxed as an S Corp.

Does the business owner need a W2?

Sometimes a business owner needs a W2. For example, a person seeking a self-employed H-1B visa would need a W2. An S Corp issues to its owner a W2. Similarly, an LLC taxed as an S Corp issues to its owner a W2. An LLC taxed as a sole proprietorship or partnership does not issue a W2 to its owner.

Other considerations?

This article addresses some of the popular factors when determining whether an LLC or S Corp is better for a small business. However, there are many other factors. To determine if an S Corp or LLC is better for you, contact a Minnesota S-Corp and LLC attorney.

Is a Minnesota S-Corp and LLC right for me?

Attorney Aaron Hall is experienced in S-Corp and LLC formation issues. He also advises corporations, partnerships, and other small businesses on a variety of business law issues. To discuss your questions with a business lawyer, contact Aaron Hall for a phone consultation.

Video Transcript:

One of the biggest questions new business owners have is “what type of business should I get?” They understand generally that a partnership or a sole proprietorship does not give them limited liability, so they are looking at an LLC or a corporation taxed as an S-Corp.

There are a couple key differences between the two. One is if you have multiple owners there are going to be significant differences between the two because an LLC has flexibility to be drafted many different ways to reflect how the owners are going to be treated, whereas an S-Corp has a very standard way. In an S-Corp, if you have a 20% owner, that owner gets 20% of the profits. In an LLC, a 20% owner can get any percentage of the profits. Now if you have an LLC, it can be taxed as an S-Corp, but then it needs to be treated like an S-Corp. In other words, the LLC has to be formed to act like an S-Corp in order to qualify for the tax benefits that an S-Corp would receive.

When we talk about tax benefits, the primary benefit there is that an S-Corp owner only pays self-employment tax, or its equivalent in payroll tax, up to the fair market value of a salary for the owner. Any profits after that are not subject to that tax, which is about 15%. So imagine you’re a business owner, you bring in $100,000 a year to yourself, in an LLC you will pay roughly 15% tax for a self-employment tax on that income. That’s $15,000. Plus you’ll pay your income tax on that as well. That’s a very large tax payment.

In an S-Corp you’ll pay that income tax and you’ll also pay a payroll tax on the fair market value of your salary. But if your salary is $50,000, the remaining $50,000, because again you have $100,000 in income, that remaining $50,000 is not subject to a 15% payroll tax or self-employment tax, which means you’re going to save 15% of $50,000. That is a very large tax savings.

So as you can tell there are some complexities here and if you’re a business owner we recommend working with an attorney to figure out which legal entity is going to be right for your circumstances based on what you expect your business to do over the next few years. We can help with getting that set up and typically the small amount that you will pay for an attorney ahead of time is going to save you substantially as far as legal compliance and tax savings for years down the road.