![]() S corp taxation will save you about $2,000 in self-employment taxes with a net income of $30,000 - and about $3,000 with a net income of $40,000. Most people start thinking about switching to an S-corporation when their net income - that is, minus your business expenses - starts to exceed $30,000. Does it make sense to choose S corp taxation? Next, none of those shareholders can be corporations, partnerships, or non-resident aliens. First, it needs to have 100 or fewer shareholders. However, there are certain conditions your LLC has to meet to be treated as an S corp for tax purposes. The lack of double taxation makes the S corp an attractive option when it comes to corporate taxation for LLCs. That means the shareholders are just taxed just once, on their personal income taxes. Instead, their profits pass through to the individual shareholders' income tax returns. Unlike C corporations, they aren't subject to double taxation. S corporations are favored by small businesses. But this isn't likely to be relevant to many freelancers. One pro to C corp taxation is that C corp owners aren't limited in how much they can deduct for benefits like health insurance, retirement plans, and life insurance for their employees. For that reason, it's a pretty uncommon choice. This is called “double taxation.”ĭouble taxation means C corp taxation isn't a financially sound option for most LLCs. Meanwhile, its shareholders pay income taxes on the dividends that they receive. When an LLC is taxed as a C corporationĬ corporations pay corporate income tax on their net income. In that case, your options are C corporation taxation and S corporation taxation. Instead of being taxed as either a sole proprietorship (for single-member LLCs) or a partnership (for multi-member LLCs), you can choose to have your LLC taxed as a corporation. That's because they don't have their own tax rate classification. Members of the LLC will each report income and losses from their share of it on their personal tax returns. If you have a partnership LLC - meaning, it's run with someone else - you'll also have to deal with self-employment tax by default. That means you'll still receive a 1099 and have to deal with self-employment tax. ![]() For tax purposes, the IRS will treat it just like a sole proprietorship by default. Say you run an LLC by yourself, making it a single-member LLC. But it won't automatically limit your tax liability. For freelancers who simply want to avoid liability for their business's legal and financial obligations, an LLC makes more sense.Īn LLC limits your legal liability. But the corporation structure offers less flexibility than an LLC, and comes with more compliance requirements.Īt the end of the day, corporations are more suited to business owners who plan on seeking outside investors. Like LLC owners, the owners of a corporation aren't personally liable for business obligations. The other option for doing that is a corporation. LLC vs corporationĪn LLC isn't the only way to form a business entity. This allows you to keep your business income and expenses separate from your personal finances, which some freelancers find helpful for bookkeeping. ![]() You can also set up a business bank account. You can apply for an Employer Tax ID (EIN), which you'll be able to use instead of your Social Security Number when you send Form W-9 to vendors. Setting up a separate entity for your business comes with other benefits. With no legal protections or separate business finances, your home and car would be on the line if your business is sued, or if its creditors come knocking. If you’re doing business as a sole proprietorship, on the other hand, you don't have that corporate shield to protect your personal assets. (You'll still be liable for the debts that you've personally guaranteed, though.) Personal assets - your house and car, for instance - are safe. If you own an LLC, you'd only risk the amount of money you have invested in your business. This separation is what provides you with asset and liability protection. When you form an LLC, you establish a new separate legal entity. sole proprietorshipĪs mentioned above, the biggest benefit of the LLC isn't tax-based, it's legal. Here's how LLCs compare to the two other options for running your freelancing business. In the world of business structures, LLCs fall into an interesting niche: they offer more legal protection than a sole proprietorship and more flexibility than business structures like corporations. How LLCs compare to other business structures
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