According to a recent Treasury analysis, “the President’s strategy will protect 97% of small company owners from income tax rate hikes while delivering tax relief to more than 3.9 million entrepreneurs.” The money raised from a fairer tax system for Main Street will go toward initiatives that will help expand our economy and create jobs, such as small business investments. Tax Foundation: Almost 97% of SME’s Exempt From Biden Tax Plans
The existing tax structure favors huge international corporations over small businesses on Main Street in the United States. To understand why this new tax plan is advantageous, we must first discuss the difference between small businesses and corporations.
In the below discussion, we will compare S Corp and LLC:
Limited Liability Company (LLC)
Limited liability companies (LLCs) are commonly used by a sole proprietor (single owner) or a company with two or more owners because of its fundamental liability protection benefits (partnership). LLCs insulate the owners’ personal assets from the company’s losses, obligations, and judicial judgments. Because LLCs are taxed differently than typical corporations—or C Corporations—they may give some tax benefits.
An LLC can be used for a small business or a legal entity that owns commercial property, such as a doctor’s or dentist’s office. In addition, family members who conduct business in states that permit LLCs can form an LLC. Entrepreneurs should think about the many qualities connected with forming an LLC before doing so, which include the following.
Ownership of an LLC
A limited liability company (LLC) can have an unlimited number of owners, often known as “members.” These owners could be citizens, non-citizens, or non-residents of the United States. LLCs can also be held by any other sort of corporation, and they are subject to far less restriction when it comes to forming subsidiaries.
Business Operations of an LLC
The activities of LLCs are far simpler than those of other company structures, and the requirements are modest. While it is recommended that LLCs follow the same rules as S corporations, they are not obligated to do so by law. Adopting bylaws and holding yearly meetings are two examples of these requirements.
An LLC’s Management Structure
An LLC’s owners or members can choose whether the business is administered by the owners or by designated managers. If the LLC chooses to have the owners serve in managerial roles, the business will function similarly to a partnership.
Fees and Taxes for Limited Liability Companies
Limited liability corporations are taxed differently than other types of businesses. An LLC allows for pass-through taxes, which means that the business’s profits and losses are reported on the owner’s personal tax return rather than the company’s. As a result, profits are taxed at the owner’s personal rate of taxation. In most cases, a single-member LLC is taxed like a sole proprietorship. Profits, losses, and deductions from taxable income that are business expenses are all recorded on the owner’s personal tax return. An LLC with many owners is taxed like a partnership, which means that each owner must record profits and losses on their personal tax return.
S Corporation Tax Foundation: Almost 97% of SME’s Exempt From Biden Tax Plans
The structure of an s corporation also protects the personal assets of business owners from corporate liability and passes through profits, usually in the form of dividends, to prevent double taxation. Some of the characteristics of s corporations are listed below.
An S Corporation’s Ownership
S corporations have more ownership restrictions, according to the IRS. There can’t be more than 100 major shareholders or owners in these companies. Individuals who are not citizens or permanent residents of the United States cannot possess S corporations. Furthermore, no other business body can own an S corporation. Other S companies, C corporations, LLCs, business partnerships, and sole proprietorships are all subject to this restriction.
Business Operations of an S Corporation
In terms of formal operational requirements, there are major legal differences, with S corporations being far more strictly formed. S corporations must comply with a slew of internal requirements, including tight rules for establishing corporate bylaws, holding initial and annual shareholders meetings, keeping and retaining company meeting minutes, and a slew of rules for issuing stock shares.
S Corporations’ Management Structure
S corporations, on the other hand, must have a board of directors and corporate officers. The board of directors supervises the management and makes important corporate decisions, while corporate officials such as the chief executive officer (CEO) and chief financial officer (CFO) oversee the company’s day-to-day operations.
Taxation and Fees for S Corporations
For federal tax purposes, S corporations can elect to pass through corporate income, losses, deductions, and credits to their shareholders. The flow-through of income and losses would be reported by the S corporation’s stockholders on their personal tax returns. As a result, the assessed tax would be determined using their personal income tax rates. This pass-through function aids S corporations in avoiding double taxation, which occurs when the company’s income is taxed at the corporate level and then again when dividend income is taxed on shareholders’ personal tax returns.
Final Thought
Because there are fewer operating restrictions and reporting requirements, LLCs are easier and less expensive to set up, maintain and remain compliant with applicable business laws. Nonetheless, the S corporation structure is preferred if the company needs a large amount of outside funding or plans to issue ordinary shares in the future. To make an informed decision about what sort of business entity is most suited for your specific business, it is normally recommended that you speak with a corporate lawyer or accountant.
