If you’re planning to open a new business, you may have heard that limited liability companies (LLCs) and S Corporations are pass-through entities.
Owners of both the LLC and the S Corporation get tax benefits because they pay the personal income tax rate on the business profits instead of the corporate tax rate. Owners of S Corps can realize even more tax savings. Instead of the individual tax rate on all income, the business owner pays income taxes on their salary and the share distribution tax on other business income. Many states set the tax on share distributions at a lower rate than individual income, saving you money on taxes.
Can my business benefit from the S Corp election? Can I save money on taxes by forming an LLC vs. an S Corp in Georgia? Our team of business experts have heard your questions. We made this page to guide you through the pros and cons of the LLC vs. S Corp in Georgia.
When comparing the S Corporation vs. LLC in Georgia, the first thing you need to know is that the S Corporation isn’t a business structure but a tax treatment. Before electing S Corp tax status, you must form a registered business entity (a corporation or LLC). Thus, if you start an LLC and elect S Corp taxation, your business is technically both an LLC and an S Corporation.
Your existing ownership structure doesn’t change when you elect S Corp status. To determine whether an LLC or S Corp is better in Georgia, examine your business goals and consult your tax professional, who can advise you on your tax situation.
Next, we’ll explain how the different legal entities are taxed based on the federal and state tax codes.
To understand the potential tax savings of the S Corp election, consider the differences between LLC vs. S Corp vs. C Corp in Georgia. When a corporation pays federal income taxes, the tax code classifies the business as a “C Corp.” A C Corp pays corporate taxes on the business income, and the owners pay individual income tax on their salaries. Neither S Corps nor LLCs pay federal taxes at the corporate level, but there are still differences between S Corporation vs. LLC taxation for an LLC in Georgia.
Small business owners can benefit from forming an LLC or S Corp because they can escape this double taxation on their income. Neither the LLC nor S Corp pays corporate taxes except by paying employee wage withholding.
The IRS automatically taxes an LLC as a partnership. LLCs taxed as partnerships pass all their income on to the owners, who pay personal taxes on their share. Because owners are not employees, they pay the self-employment tax on all their income from the business (including guaranteed payments).
When LLC owners elect S Corp status, they set themselves a reasonable salary and pay income tax on it as wages. Owners report other income on their personal tax returns as share distributions. The IRS exempts share distributions by S Corporations from income tax and taxes them at a different rate. Because the share distribution rate is typically lower than the individual income rate, owners can often realize tax savings by making the S Corp election.
At the state level, the Georgia Division of Taxation collects a corporate income tax and net worth tax from all businesses taxed as corporations, including S Corporations. Georgia recognizes the federal S Corporation election unless your LLC has non-resident owners. Thus, the annual corporate tax for an LLC vs. S Corp in Georgia depends on whether your LLC makes the S Corp election. If you elect S Corp taxation, Georgia will recognize your LLC as an S Corporation, and you must include the corporate income tax on your personal return. In addition, all corporations doing business in Georgia for the first time must file an initial net worth return on or before the fifteenth day of the third calendar month after qualifying in the state.
Entity-Level Income Tax: Georgia Corporate Income Tax
Individual Tax Rate: Owners pay individual income tax on wages
Entity-Level Income Tax: None
Individual Tax Rate: Georgia Corporate Income Tax paid on individual owner’s return
Entity-Level Income Tax: Self-employment tax on all income
Individual Tax Rate: Owners pay individual income tax on wages and share distribution tax on other business income
When comparing S Corp vs. LLC in Georgia, both LLCs and S Corps have limits on ownership. The LLC Operating Agreement describes the circumstances under which new owners can join the business. The Operating Agreement will require the consent of all the members before adding a new member. If you’re unsure how to write an Operating Agreement, we offer an Operating Agreement Template for LLCs.
On the other hand, the law limits who can own an S Corporation. (However, an S corp can own other businesses.) Before your business can qualify for the S Corp election, it must:
As you can see, the S Corp is meant to benefit small businesses. To determine whether the S Corp is the best choice for you, it’s a good idea to consult an accountant or attorney. While we’ll guide you through the steps to business ownership, only a professional can give you individualized advice.
Because the S Corporation is an elective tax status, it doesn’t change the underlying business. Many entrepreneurs start LLCs because their personal assets are legally protected from their business liabilities. Electing S Corp treatment will change how you pay your taxes but won’t affect your personal liability protection.
Before electing S Corp status, you must register your business as a legal entity. To form a Georgia LLC, you’ll file Articles of Organization with the Georgia Secretary of State. If you’re ok with being taxed as a partnership, you don’t need to take any further action. If you want to make the S Corp election, you must file additional paperwork.
First, you’ll file Form 8832 to let the IRS know that you want your LLC to be taxed as a corporation rather than a partnership. Then, you’ll file Form 2553 to elect S Corporation status. Georgia recognizes a federal S Corp election unless your LLC has non-resident owners. In that case, all the shareholders must agree to file a Georgia income tax return and certify their consent on Form 600S-CA.
Georgia requires each LLC to file an annual registration with the Secretary of State.. Owners can choose to renew their registration for one, two, or three years. In addition to keeping your registration current, you must file a yearly tax return and maintain your tax payments.
If you’re worried about the requirements for legal compliance, we can help. Our Worry-Free Compliance Service will help ensure you keep up with the laws. We’ll send you reminders of compliance deadlines and keep your documents together on your dashboard. It also includes up to two amendments per year, so you’ll always be up to date.
Yes. Because the S Corp election is an additional step after creating an LLC, you can choose to convert your LLC to an S Corp for the tax year.
After you form your LLC with the state, you can elect to give it S Corporation status by filing Form 8832 and Form 2253 with the IRS. Georgia automatically recognizes the federal election unless your LLC has non-resident owners.
No. You can still call your business an LLC after converting it to an S Corporation. Your underlying business structure doesn’t change, because an S Corporation is a tax designation, not a separate business entity.
Your S Corp status continues until you revoke it. Thus, the best time for your LLC to elect S Corp status is when it makes sense for your tax situation. The IRS requires you to make the S Corp election within the first two months and 15 days of the start of the year. If you need to file a non-resident consent with the Georgia Division of Taxation, be sure to file before your tax due date (usually three months and 15th days after the taxable year’s end).
Our business experts are here to help you through every step of business ownership. We’ll help you compare the LLC vs. the S Corp in Georgia, and we’ll be here to help you stay in compliance. If you’re ready to start your new business, we offer Formation Services to help you form your Georgia LLC or Georgia S Corporation. Add our Worry-Free Compliance Service, and our business experts will provide you with everything you need to know about keeping your business in good legal standing.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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