S-Corp vs. LLC: Which Business Entity Is Right for You?

You’ve been hard at work growing your small business, and things are starting to really take off. 

Suddenly, everyone and their mother is tossing in their opinion about your business structure. “Just form an LLC” and “go S-corp” are phrases you hear constantly. 

Despite good intentions, most people aren’t using these terms correctly, which can cause you some headaches if you opt for the entity that doesn’t best serve you.

In this blog, we’re going to cut through the noise and break down:

• The differences between an S-Corp and an LCC

• When one makes more sense over the other

• Some smaller details NY, NJ, and CT businesses need to know

First, let’s clarify what each term means.

Structural Differences Between LLCs and S-Corps

Contrary to popular belief, this isn’t an apples-to-apples comparison. Each entity has different income, legal, and tax implications.

What is an LLC?

A limited liability company (LLC) is a legal business structure created at the state level to separate personal assets and business liabilities. 

That means if your business gets sued, your personal assets (your finances, home, etc.) are generally safe. 

From a tax standpoint, the IRS ignores your single-member LLC by default, so all your business profits funnel directly to your personal tax return and are subject to 15.3% self-employment tax. 

What is an S-Corp?

An S-Corp is a federal tax election selected using IRS Form 2553, with no legal implications. You can choose to be taxed as an S-Corp even if you have formed an LLC.

Essentially, when business owners ask if they should form an S-Corp, they should really be asking if they want to have the tax benefits of filing as one.

Speaking of tax benefits…

Tax Differences of an LLC and an S-Corp

The main tax difference between an LLC and an S-Corp comes down to salary and costs. 

Single-member LLC owners typically count all profits as their income, and that money is taxed as such. 

S-Corp owners need to pay themselves a “reasonable salary” that is then subject to payroll taxes. Any profit above that salary can count as “owner distribution,” which is not subject to self-employment tax.

As an example:

• An LLC-owner earning $100k pays self-employment tax on the full $100k

• An S-Corp owner earning $100k who pays themselves a $70k salary only pays self-employment tax on the $70K

  
  

When an S-Corp Election Makes Sense

You may want to elect S-Corp status if your profits are high enough that the self-employment tax savings outweigh your costs. 

S-Corp status comes with heavier administration costs like running payroll, filing separate business tax returns, and more stringent bookkeeping. That can add thousands of dollars a year to your costs.

Generally speaking, if your net profits hover around $50,000 to $60,000 per year at least, this election likely makes sense.

When Staying a Standard LLC Makes Sense

Remaining a standard LLC and skipping S-Corp status helps avoid some complexity that not all businesses are prepared for.

You should probably stay as an LLC if:

• You’re in your early stages or have lower revenue

• You have unpredictable or seasonal income

• You want to simply focus on growing your business rather than optimizing taxes

• You have a multi-member LLC with complex ownership

For business owners in New York, New Jersey, and Connecticut, there are some small print items you’ll want to know.

S-Corp Need-To-Knows

State treatments of S-Corps vary greatly. You need to be aware of certain technicalities before you elect that status.

For New York Business Owners

While New York State recognizes S-Corp status, New York City does not fully, meaning your business may still be subject to the city’s corporation tax.

Also, although the status is recognized by the state, you’ll still need to file a NY S-Corp return (Form CT-3-S).

For New Jersey Business Owners

New Jersey imposes a minimum tax on S-Corps based on gross revenue. That minimum ranges from $375 to $2,000+ per year, which may not be a dealbreaker, but is still something to keep in mind.

For Connecticut Business Owners

Connecticut has a pass-through entity (PE) for S-Corps and partnerships that carries a 6.99% tax rate. Any PE that does business in Connecticut or has income derived from or connected to the state may elect to file Form CT-PET, regardless of the amount of your income.

Figure Out Your Filing Status with AVM DeMars

There’s no one answer for how to structure your business and tax status, but it’s important to figure it out so you don’t leave money on the table or pay for complexity you don’t need.

If you're a business owner on Long Island, in New Jersey, or across Connecticut and you're not sure which structure fits your situation, the tax experts at AVM DeMars can help you run the numbers. We’ll look at where your business is today, where it’s going, and your state’s rules to determine the best course of action for your small business.

Schedule a consultation with our team today to get started.