Tax Differences Between an S Corp, C Corp, and LLC

Wondering about business structure and whether to form an LLC, S-Corp or C-Corp? On today's episode of the Wiser Roundtable Podcast, Jordan Sute, CPA, joins Casey to talk about the tax differences between an S Corp, C Corp, and LLC. In 2009, there were 560,000 new businesses formed. In 2020, there were 804,000 new businesses formed. Every year, there are more companies being formed in America. In light of that, we wanted to go down the list of business classifications and discuss each individually.
SUMMARY
Sole Proprietor
If you do nothing, you are a sole proprietor. It all goes on your personal tax return. The downside is that you have to pay income tax on all earnings and self-employment tax. You do get the employer side deduction on the other side of that, but it doesn’t necessarily offset your self-employment tax, especially if you have a lot of earnings. Self-employment tax is your Medicare and FICA tax that you would be paying if you were a 1099 employee. This also means that you are personally liable for any lawsuits against the business.
Limited Liability Company (LLC)
For tax purposes, there is not a big difference between an LLC and being a sole proprietor when it comes to filing taxes. It does allow you to explore your options of filing an S Corp or a partnership. The LLC will shelter your liability. This means that all lawsuits would stop at the LLC and not be able to reach your personal assets.
LLC and S Corp
To become an S Corp, you would have to incorporate or become an LLC that is an S Corporation. The rules for applying are a little strict and should be looked at with a CPA. The biggest advantage is the savings on self-employment tax. If you are an S Corp, there is a way to escape payroll tax as long as you show a reasonable wage. The idea is that you would take a salary and then take a draw that is subject to income tax.
Multimember LLC
If you’re a single member of an LLC, it just flows through your personal tax return. If you’re a multimember LLC (a partnership), there is an additional tax filing. Anyone can own an LLC except for banks.
Starting an S Corp
You don’t have to be an LLC and then file for an S Corp, you can just file for an S Corp. You would incorporate and then choose to be an S Corp. Then you would become a shareholder rather than a member. Corporations cannot own S Corps, but LLC’s can own S Corps. The disadvantages are the formalities of the process - you have to maintain good books and records.
C Corp
There would have to be something other than tax leading you to create a C Corp because it really is not advantageous at the small business level. The C Corp is its own entity and it pays tax at the corporate tax level. If it has a loss, the loss stays at the C Corp. You don’t get to offset any of your personal income tax filing.
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Timestamps:
1:52 Sole Proprietor
4:17 Limited Liability Company (LLC)
5:30 LLC and S Corp
13:36 Multimember LLC
16:49 Starting an S Corp
21:16 C Corp
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