Many business owners choose to set up their business as a limited liability company (LLC) because it allows them to report and pay their tax obligation along with their personal return. Business owners also like that an LLC comes with built-in liability protection that keeps potential creditors’ hands off their assets. It’s not uncommon for many business owners to decide to form other business entities to minimize their tax burden. An S Corporation is a typical formation that business owners select.
An S corporation is a type of elected tax status. They can have as many as 100 shareholders, whereas an LLC can only have a handful of them. S-corp owners may enjoy a self-employment tax break provided that they pay themselves a reasonable salary. The same options don’t exist if you set up an LLC. These business owners can file their taxes as S-corps, though.
Choosing between an LLC or S-corp isn’t hard. The stage that your business is in will largely dictate what type of entity you set up. Most startup owners will elect first to incorporate themselves as LLCs; however, they may change over to an S-corp to reduce their self-employment tax burden of 15.3%.
Once you become an S-corp and start receiving a regular salary, it becomes the obligation of the business to pay your payroll taxes. You’re entirely obligated to pay the full statutory self-employment taxes on the company’s entire gross income if you have an LLC.
Another great benefit associated with setting up an S-corp is that if it makes additional earnings or revenue over a certain amount, shareholders could receive their portion of those funds as dividends. The IRS taxes these at lower amounts than income.
The downsides to becoming an S-corp is that you can only have 100 shareholders and one class of stock. Those shareholders end up owning at least 2% of the stock in the business. Business owners are subject to a salary cap and can’t take tax-free deductions for employee health insurance as C-corp owners can, though.
There are many pros and cons associated with forming your Denver company as an S-corp over an LLC. Most every one of these benefits and downsides center around taxes. An attorney will want to know more about your Colorado company and your financial objectives before advising you on what type of structure to choose.