Single Member LLC vs. S Corporation: Which One is Right For You?

You have the great idea, you’ve developed the skills you need to do your job well, but now it’s time to turn all of your ideas and your potential into an actual business. Formalizing can feel like a scary first step, and a quick review of the IRS’s website may itself feel quite overwhelming. When starting a small business, an important first step is to determine how to structure your organization. Two options that are widely chosen by small to mid-sized business owners are the Single Member LLC and the S Corporation.

Single Member LLC

LLC stands for limited liability company, and that limited liability is one of the hallmarks of this type of business. Single Member LLCs are considered pass through entities, meaning that the income passes through the company and is co-mingled with the personal finances of the owner, the owner (or member) then files business taxes along with his or her personal taxes.

S Corporation

In an S Corporation, also a  pass through entity, the owners or “shareholders” pay themselves a salary and are paid dividends which they then file on their personal tax returns at their own individual tax rates. This means the company avoids being taxed at the corporate level.  Additionally, S Corporations can only have 100 shareholders, and interestingly they all must be U.S. citizens.

With this information in hand you may still be wondering what the best choice is for you. Here are a couple of things to think about. An S Corporation is simply more expensive to start, and the process of starting it is more complicated than that for an Single Member LLC. However, along with that complicated process comes more structure. S Corporations are required to have bylaws and formalized corporate practices and then they have to prove that they’re maintaining them. While, on the other hand, LLCs provide far more flexibility to their owners.

At the end of the day, choosing between an S Corporation and a Single Member LLC is dependant upon your specific company. Every business is different, and the decision to take the next big step is an exciting one! Before you jump in and starting filing paperwork, give us a call and let's talk about all of your options. Set your business up for financial success by engaging experienced, professional advisors from day one. At Fix It Accounting we take great pride in serving small businesses all over the country.