There are lots of things to consider when it comes to registering your business as an LLC or an S-Corp. Today I’m breaking down the simple facts about both LLCs and S-Corps so that you’re better prepared to make the best decision for your business.
What’s so great about being an LLC?
As a beauty professional, you can choose to file as a Limited Liability Company (LLC) with your state. This makes your company a legal entity, registered with a legal name, and protected from certain threats that non-legal entities do not have. Filing as an LLC gives you, the business owner, personal protection from lawsuits and creditors trying to take your hard-earned money. These issues remain at the business level and do not affect you on an individual level. That means things like your personal bank account or house are kept safe should anything go awry with your business.
It also makes filing taxes simple.
If you are a single owner LLC, your business taxes can be really easy - you will report your business income on Schedule C on your personal tax return. One single tax form for both your business and personal taxes is pretty sweet!
Single owner LLCs also pay self-employment tax - a 15.3% extra tax only for business owners. Being an entrepreneur is not cheap, right!
One more thing to be aware of is, if your business has more than one member listed on your LLC, your company will be taxed as a partnership. In this case, each member will fill out a separate tax form - a 1065 form. Each member will receive a Schedule K-1 detailing their share of business income and losses. The K-1 gets added to your personal tax return.
S-Corporation: the fancy hat that can save you thousands at tax time
So, right off the bat, LLCs are different from S-Corps for one very important reason: LLCs are legal entities, and S-Corp is an IRS designation; the big difference is that you need a legal entity (like an LLC or Corporation) to have an S-Corp.
Think of LLCs as the outfit your company wears, and an S-Corp designation as the hat (if this particular hat fits your company’s head!) You cannot designate yourself as an S-Corp without first registering as an LLC. Just like you wouldn’t want to leave your house without clothes on, but wearing a hat...or maybe you would, I’m not here to judge. But the IRS is. So you need to be an LLC or Corporation before you can be an S-Corp.
Once you identify as an S-Corp, filing taxes has extra steps to it and is more work, but it can certainly be worth the effort if your company makes over $50,000 a year in profit.
You may be fine to DIY when you’re a single owner LLC, but when you are an S-Corp, you need the support of a licensed professional to make sure everything is filed correctly. This is an extra cost for your business, but well worth it because being an S-Corp can save you thousands of dollars a year. A good accountant will help you run an analysis to make sure that being an S-Corp is the right option for you!
When your company is an LLC registered as an S-Corp, your business income will still be taxed at the personal level, but you will also have another form to fill out: the 1120-S. When the 1120-S is complete, you’ll receive a K-1. The K-1 has to be entered on your personal income tax return.
How much will I save by electing S-Corp status?
How much you save by making an S-Corp election completely depends on your business profit. It can be a few thousand or even $10,000. The higher your business profit, the more money you will save. In general, you want to have at least $50,000 of profit before considering an S-Corp election so that your tax savings are more than the extra costs it takes to run an S-Corp.
Wondering about your specific situation? Take this handy quiz to see how much you could save.
How do I pay myself when I own an S-Corp?
S-Corp owners receive the income from their businesses in two different ways:
1) Payroll - The taxes paid on the payroll are equivalent to self-employment taxes.
2) Owner Draws - These payments are not subject to self-employment tax.
This is the reason why successful beauty professionals generally want to be an S-Corp.
Now before you get too clever, know that running a reasonable payroll is a requirement for S-Corps, so don’t set one up thinking you’ll pull all the money out as an owner draw.
Which one is right for your business?
Generally speaking, if you’re a small business, being an LLC is the easiest way to be protected and file your taxes each year, especially if you’re a solo beauty pro. However, there can be big benefits to being an S-Corp when it comes to tax time savings, so it’s important to make the right choice for your business.
We’re here to answer any questions you may have about your taxes this season, and we’d love to help you figure out if an LLC or an S-Corp is right for you! Please don’t hesitate to call us, shoot us an email, or schedule an appointment to sit down to discuss your options.