S Corps Versus Limited Liability Companies (LLC)

An S Corp is one of three ways a business can choose to incorporate their business. This choice generally appeals to self-employed business owners who are looking to incorporate their business. An S Corp provides the best method for these self-employed business owners to pay the smallest amount of self-employed taxes possible.

Essentially, an S Corp is set up so that there are no corporate taxes, another big plus for self-employed business owners looking to incorporate. Rather, these are passed through to the owners of the company. The S Corp itself doesn't pay any federal income taxes, so in that sense a self-employed business owner will still be filing and paying taxes just how they would have even if they weren't incorporated. The S Corp still does have to file a tax return showing profits and losses, and may still be liable for state corporate income taxes.

Self-employed business owners can use an S Corp to help to minimize their self-employment taxes. Although the IRS will definitely crack down if this is abused, owners can give themselves the title of president and then pay themselves what is considered to be a "fair wage" and then have additional money paid and classified as dividends. This helps to greatly reduce self-employed taxes since those taxes only apply to the wages earned.

For others who may not be self-employed, there are still other advantages to an S Corp. Namely, the limited personal liability of a corporation makes incorporating a huge advantage. Creditors can usually only go after assets of the corporation, not the owner, in cases of debt. However, it is important that owners keep the financial affairs of themselves and the business far apart if they plan to maintain this limited liability.

The pass through of losses to shareholders can be a big plus. So, if you've invested $20,000 in a business that you're running and the venture loses $10,000 in the first year, you can take that loss against other income on your personal income tax return. This can be a big benefit since it will help to alleviate the losses and prevent them from impacting the corporation as much as they would if it were not an S Corp.