Small BusinessTax Planning

Pros and cons of an S-corporation vs. a single member LLC

An S-corporation and a single member LLC taxed as a “disregarded entity” share many things in common. The post focuses on some of the differences.

What’s the best reason to consider S-corporation over single person LLC?

Liability: Many people would say that it limits the owner’s legal liability. But that’s not supported by actual case evidence. The reality is that one person businesses have a difficult time separating the individual issues from the business issues in lawsuits.
Audit risk: The best reason might be lower risk of audit. I’m not allowed to recommend a position based on the risk of audit as a professional ethics issue. But all of the IRS audits I have seen in the past 5-10 years have all been on schedule C businesses. Small corporations are generally not audited.
Wage taxes: S corporations can avoid wage taxes on part of the earnings. But that savings is offset by the requirement to maintain payroll, pay other corporate taxes and filing fees, and the requirement to prove “reasonable compensation” was paid to the owner. So the net savings may not be as large as it appears.
Bypass deduction limitations: In some states like New Jersey, a special election available starting in 2020 lets owners to bypass the $10,000 tax deduction limitation on real estate taxes. Of course, this benefit has limited appear to a narrow audience.

What are the disadvantages of an S-corporation vs. a single member LLC?

A S-corporation has higher operating cost. There are also tax disadvantages for owning and transferring title to some assets like real estate.