It’s common for business owners to be uncertain about the tax repercussions of setting up an S-Corp or an LLC. It’s critical to realize that the tax advantages and structures of the two organizations vary. Some business owners, however, might prefer to set up an LLC that is taxed as an S-Corp. Whether an S-Corp can own an LLC taxed as an S-Corp and other pertinent issues will be covered in this article.
Yes, an S-Corp can own an LLC that is taxed as an S-Corp, to give the quick answer. There are several things to keep in mind, though. It’s critical to realize that an LLC is a sort of company structure, whereas an S-Corp is a type of corporation. Different tax incentives and structures apply to each entity. The income and losses of an S-Corp are passed through to the shareholders and recorded on their personal tax returns because it is taxed as a pass-through corporation. On the other hand, an LLC may be taxed as a partnership, S-Corp, C-Corp, sole proprietorship, or other entity.
Profits and losses from an LLC owned by an S-Corp will be distributed to S-Corp shareholders. As a result, the S-Corp shareholders must disclose their individual tax returns’ portions of the earnings and losses. However, keep in mind that extra filing requirements and tax ramifications could exist based on state and local legislation.
How can I avoid paying the $800 franchise tax? LLCs must pay an annual franchise tax of $800 in California. There are, nevertheless, several ways to get around this fee. One method is to establish an LLC in a state without an annual franchise tax, such Wyoming or Nevada. Creating your LLC as an S-Corp is an additional choice. The $800 annual franchise tax in California does not apply to S-Corps.
The tax rates for S-Corps in 2021 are the same as those for individuals. The quantity of income earned affects the tax rate. As an illustration, the tax rate for people making less $9,950 is 10%, while the rate for people making between $9,951 and $40,525 is 12%.
As previously indicated, setting up an LLC as an S-Corp will assist you avoid California’s $800 yearly franchise tax. LLCs can also benefit from certain credits and deductions that might lower their tax obligations. To identify the optimum tax approach for your company, you should speak with a tax expert.
An S-Corp is taxed as a pass-through entity, which is one of its key tax benefits. As a result, the shareholders are taxed at their respective tax rates on both gains and losses. Additionally, unlike C-Corps, S-Corps are not liable to double taxation. Additionally, S-Corps are able to write off some employee fringe benefits including health insurance payments.
Finally, an S-Corp may hold an LLC that is subject to S-Corp taxation. However, it’s critical to comprehend the tax ramifications and documentation needs. Additionally, setting up an LLC as an S-Corp will assist you avoid California’s $800 yearly franchise tax. The optimum tax approach for your company can be determined by consulting with a tax expert.