S Corp Versus LLC

The next pay per view! UFC #58,723, The Apology… S Corp Versus LLC… Sunday Sunday Sunday!

Since this book is about LLCs and S Corps, and we’ve already discussed a ton of stuff, we put together a small table to illustrate the S Corp vs LLC contrasts and comparisons; sounds like the start of a college essay. Yuck.

Here we go-

* See below
** Partnership limited partner rules can produce a different result, as discussed earlier in this chapter.

Difference Between an LLC and an S Corp

Quiz time! What’s the difference between an LLC and an S Corp? None, except the reduction of self-employment taxes and the tax return form number. That’s it! Ok, perhaps that is not entirely true, as the extra rows in the table suggest. A low salary keeps payroll taxes down, but it also caps the compensation available for retirement plan contributions, and an S Corp generally allocates income and losses according to ownership rather than allowing partnership-style special allocations.

The little asterisks are referencing the Section 199A income limits, where a secondary test can shrink the deduction. Once you are fully above the phase-in range, the deduction is generally the lesser of 20% of qualified business income or 50% of the W-2 wages paid (or a version that also counts qualified property). An LLC under default taxation cannot pay its owner W-2 wages. A partner cannot be an employee of the partnership (Rev. Rul. 69-184), and a single-member LLC owner cannot be an employee of their own disregarded entity. Ok, wow, rules and such, right?

Elect S Corp taxation, however, and the owner can become a shareholder-employee receiving W-2 wages. For a non-SSTB fully above the phase-in range with no other employee wages or sufficient qualified property, that can make the difference between getting a Section 199A deduction and getting nothing. The flip side is that the S Corp salary itself is not QBI, which is why the optimization in the Section 199A section matters.

What Does an S Corp Cost?

There are two additional burdens when exploring the LLC vs S Corp comparison-

Tax return preparation, and the subsequent fee. A Form 1120S is a business entity tax return, and WCG’s fee typically runs $1,500 to $1,800. See wcginc.com/fee for current pricing.

Payroll processing. As an S corporation you must pay shareholders who work in the business a reasonable salary as employees. This adds a financial burden as well as a series of administrative “touches,” plus unemployment taxes and, in some states, disability or paid family leave contributions.

But! As you will see, the savings can be significant. For a small increase in chores, you could easily save thousands of dollars. Yes, plural. Why save thousands when you could save hundreds? (A Dr. Evil reference for the young’uns.)