S Corp vs LLC: What’s the Difference? - Physician on FIRE (2024)

Are you going down the locum tenen physician route? Or are you establishing your own medical practice? As a non-employee, you’re now responsible for the ins and outs of your business – so choosing the right taxation and securing liability protection is key.

Doctors with side hustles often opt for sole proprietorship, but smaller or growing businesses should investigate the benefits of LLCs and S Corps. Not only can you protect your personal assets, but there’s also the potential to score significant tax savings.

Keep reading for a full breakdown of LLC versus S Corp to see which is your best fit.

This article will include:

• The key differences between an S Corp and an LLC.
• S corp vs LLC taxes and savings.
• Which is the right direction for you.

Read more:

• 14 Ways to Lower Your Taxes
• Ideal Income for Sole Proprietors
• What Is The Best LLC Structure For Your Rental Properties?

What Is the Difference Between LLC and S Corp?

LLCs and S Corps tend to be the go-to for physicians in private practice – with a survey finding that 27.8% were part of an LLC and 24.7% in an S corporation.

However, exploring business entities and tax systems is mind-numbing enough without all the intricacies and business jargon. So, I’ll simplify it – starting with a good old comparison chart.

Here’s a roundup of the key LLC vs S Corporation differences:

Note: While both offer limited liability, neither will protect you or your business from malpractice, so make sure to get insurance coverage.

What Is an LLC?

An LLC, short for “limited liability company,” is a corporate structure offering protection and flexibility.

When you opt for an LLC, you place a legal fence between the company and the owners. So if things go south, you’re not personally responsible for business debts or liabilities – personal assets like your home or savings are shielded.

Folks who own the LLC are called members and anyone can be a member – from individuals, corporations, and other LLCs. This versatility is one of its biggest draws – small business owners can divvy up the profits, manage the day-to-day, and maintain limited liability protection.

Tax-wise, you can opt for corporate or pass-through taxation. The latter means LLCs can report profits and losses on the owner’s personal tax returns rather than paying federal taxes directly. An LLC can also be taxed as an S or C Corp if it meets certain criteria.

Most independent physicians opt for an LLC – you get more flexibility and it’s generally easier to set up and run than an S Corp.

Note: California doesn’t allow physicians to form an LLC. Instead, doctors can go down the S Corp route.

Advantages of an LLC

• Easy to organize: With fewer obstacles and red tape, you face potentially cheaper operating costs. Compared to S corps, LLCs have fewer formalities, so you can spend less time (and money) on admin tasks and focus more on growing your business.
• Protection: With limited liability protection, your personal assets stay safe and sound, shielded from any legal or financial messes your business might experience. Worst case scenario: If your practice goes bankrupt, the owner’s assets won’t be involved.
• Flexibility: Whether you’re flying solo or prefer a hands-off approach, an LLC can accommodate your setup. You can divide ownership however you like, call the shots on management, and choose to be taxed as a corporation or pass-through entity.

Disadvantages of an LLC

• Self-employment taxes: Unlike S Corps which can often dodge some of these taxes, LLC owners have to pay self-employment taxes of 15.3% on their entire income.
• Limited lifespan: Your LLC might come with an expiration date. Some states have rules dictating an LLC has to pack up and dissolve after a certain period or with events like the passing of an owner.
• Potential penalties: If you don’t make capital contributions, you could face penalties for not sticking to the Operating Agreement.

What Is an S Corporation?

An S corp is an IRS tax classification and a pass-through entity. The company’s income, losses, deductions, and credits get passed through to the shareholders, so the company doesn’t have to cough up federal income tax.

But there are a few hoops to jump through if you want to join the S-corp club. Your business needs to meet certain criteria, like having fewer than 100 shareholders and only having one class of stock.

Here are other rules you need to follow:

• Write corporate bylaws
• Have a board of directors
• Run meetings with shareholders
• Track minutes of important company meetings

Basically, there’s no slacking. But this can be worth it if you’re keen on liability protection and tax savings. You won’t need to pay federal taxes and could save on self-employment tax (more on that later).

Other handy tax deductions cover client meals, overnight travel, and commuting. You can also get deductions on home office expenses like property tax and utilities – great for physicians working from home (as long as you list your home as your business address).

Advantages of an S Corp

• Tax savings: You can pay yourself a salary to avoid self-employment taxes and generate tax deductions for wages and business expenses. You can also avoid paying federal taxes.
• Limited owners: Having restrictions on shareholders can be an advantage or a drawback. But smaller businesses looking to keep things tight-knit and manageable could benefit from these rules.
• Credibility: Another benefit of having all those regulations is that if you stick to them, it can boost the image of your business for customers and potential investors. This is a major plus for companies wanting to grow and expand.

Disadvantages of an S Corp

• Time and costs: S corps come hand in hand with more intricate documents and accounting requirements. You need to get a registered agent for the business, a board of directors, and make sure you stick to all the rules – of course, this all comes at a cost.
• Rigid formalities: S corporations have a laundry list of requirements to maintain their status, from holding regular meetings to keeping meticulous records. You’ll need to dot your i’s and cross your t’s at every turn, which can be a headache for smaller businesses without a dedicated admin team.
• Salary scrutiny: Many S Corps dodge payroll taxes by disguising employee salaries as distributions. The IRS is closely watching, so you need to pay market salaries for services before any distributions.

Differences Between LLC and S Corp

Still undecided? Let’s dig deeper into the S Corp vs. LLC tax benefits and ownership differences.

S Corp vs. LLC: Taxes

If there’s anything to know about S Corporation vs. LLC, it’s the tax differences. Both have pros and cons, with S Corps usually better suited for more developed businesses with larger profits.

Let’s start with the less perplexing – LLC taxes.

Unlike S Corps, LLCs have options. They can be taxed as a pass-through entity like a sole proprietorship or partnership or opt for the corporate tax treatment.

If you go with the pass-through route, business income or losses are recorded on the owner’s personal tax returns. So the owner has to pay taxes on the profits at their tax rate.

This system means LLCs (and S Corps) can avoid double taxation (paying income taxes twice on the same income) and don’t need to pay federal income tax. But you must still pay self-employment tax at 15.3% (Social Security and Medicare taxes at 12.4% and 2.9%).

Moving onto S Corps.

S Corps operate strictly as a pass-through entity, meaning all business profits, losses, deductions, and credits pass through to their shareholders.

As S Corps pays business owners a salary, you can save money by dictating how much salary gets taxed.

For example, if you’re making $100,000, you can pay yourself 60% in salary and 40% as distributions. This could save you a decent chunk as distributions don’t get hit with Medicare, personal income, or Social Security taxes.

But the IRS keeps a close eye on S corp salaries, ensuring they’re not trying to pull a fast one with unrealistically low wages to dodge taxes. Your salary has to be fair and square, based on industry standards and experience.

Some owners have tried to game the system by skipping out on salary altogether and loading up on distributions. I wouldn’t go down this route, as the IRS can slap you with hefty penalties if you’re not playing by the rules.

If you want to play it safe, consider consulting with a tax strategist who can help you plan and reduce your tax bills.

LLC vs. S Corp: Ownership and Management

LLCs have no limits on the number of members — you could have a whole army of owners. And who can join the club? Well, pretty much anyone. LLC ownership isn’t limited to individuals and certain trusts, you could have a C corporation or even a partnership in the mix.

With an LLC, you also have more wiggle room when divvying up the pie. You can distribute the profits and responsibilities among the owners and choose whether the managers or owners run the business.

S corps have a more rigid structure. You’re looking at a cap of 100 shareholders, and they’ve got to be either US citizens or residents — no exceptions. Plus, S Corps can’t be owned by C Corps, LLCs, partnerships, or other S Corps.

Can an LLC Be an S Corp?

Simple answer: Yes, an LLC can elect to be taxed as an S corp. You can enjoy the tax benefits of an S Corp while taking advantage of the flexibility and limited liability perks of an LLC. But there are some hoops to jump through to make it happen.

For starters, your LLC has to meet certain qualifications to qualify for S corp taxation. We’re talking no more than 100 shareholders and all US citizens or residents. Plus, you can only issue one class of stock.

And while your LLC has the S Corp tax status, it’s still legally classified as an LLC under state law. That means you’ve got to play by the rules of both worlds — meeting all the requirements and regulations for LLCs while also following the additional guidelines for S corps.

But the major benefit is by electing S Corp taxation, LLC owners can sidestep some of those self-employment taxes.

How?

Instead of being considered self-employed, they become company employees and draw a salary through the payroll.

Sure, that salary is subject to Medicare and Social Security taxes, but any extra company profits beyond your salary are spared from hefty self-employment taxes.

Which Is Better: LLC or S Corp?

Before you make any moves, weigh the tax benefits of S Corp vs. LLC. The main reason to opt for an S Corp is to save money on taxes, but I recommend only going down this route if you’re a large practice with multiple employees.

S Corps have a stricter managerial approach and can issue stock, which could be appealing to investors and help you grow.

I suggest sticking with an LLC if you’re a locum tenen physician or have a smaller practice. Like an S Corp, an LLC can offer a shield for your personal assets, but you have more flexibility in how the business runs and who can become owners.

And, of course, there’s also the option to form an LLC and elect to be taxed as an S Corp to get tax savings and flexibility – the best of both worlds.

FAQs

Can an S Corp own an LLC?

Yes, an S Corp can own an LLC, including single-member and multi-member LLCs. Many S Corps own an LLC as a holding company with solid asset protection.

On the other hand, can an LLC own an S Corp? LLC typically can’t own an S Corp, but there are some exceptions. An LLC can own an S Corp if the LLC is a single-member LLC that has elected to be treated as a disregarded entity for federal income tax purposes and follows S Corp shareholder rules.

Can a single-member LLC be an S Corp?

Yes, a single-member LLC can be taxed as an S Corp if it meets the IRS rules and eligibility requirements, and the same goes for multi-member LLCs.

S Corp criteria include having no more than 100 shareholders, only having one class of stock, and being a domestic corporation or an entity eligible to be treated as a domestic corporation.

What is a disregarded entity LLC?

A disregarded entity LLC is a business structure where the IRS discards a single-member LLC as a separate entity from its owner for federal income tax purposes.

This means the owner reports the business’s income and deductions on their personal tax return. It’s a popular choice for small businesses and solo entrepreneurs seeking simplicity in tax filings while enjoying liability protection.