Paying taxes highly depends on the kind of established business structure, where one is better than the other. Two typical options for small business owners include S-Corporations (S-Corp) and LLCs. Though both have limited liability and flexible management, their tax rules are very different. Knowledge of tax differences can guide you in choosing which one offers bigger savings in 2025.
How S-Corp Taxes Work
The federal government does not impose income tax on an S-Corporation. This means that profits and losses flow through in share to the owners, who then report it on their individual tax returns.
This setup can help reduce self-employment taxes because owners can take part of their income as salary (subject to payroll taxes). and the rest as distributions (not subject to payroll taxes).
How LLC Taxes Work
Depending on the structure of the business, taxes are imposed differently on an LLC. By default, any single-member LLC is treated like a disregarded entity, wherein profits are directly recorded on the owner’s personal tax return. Multi-member LLCs are treated as partnerships unless they choose corporate taxation
For instance, in the case of a foreign-owned single-member LLC, the company is subject to a different level of regulatory obligations than a domestic single-member LLC. This may even entail reporting additional returns to the IRS in order to avoid noncompliance.
Key Tax Savings Differences
The main potential savings with an S-Corp come from a reduction of the self-employment taxes. LLCs are simpler but may not offer the same savings if all profits are subject to self-employment tax. By comparison, LLCs are more flexible in ownership and impose fewer restrictions by the IRS.
For foreign-owned LLC taxation, please beware that the tax benefits of an S-class firm may not be available, and there may be an increased amount of reporting needs. This can influence which structure makes the most sense for an international business owner.
Special IRS Forms to Consider
There are a few situations in which a Pro Forma 1120 has to be prepared by the entity, including S-Corps, and given to the IRS to report certain details, even when there is no corporate income tax liability.
Some limited liability companies that have opted to be taxed as corporations may also be liable to this requirement. Knowing the requirements for filing this form is also important to mitigate any risks of incurring penalties.
Which One Should You Choose in 2025?
If your main objective is minimizing your self-employment taxes and your business qualifies as an S-Corp. Then the latter can potentially lead to more savings. If you want simplicity, flexibility, or have a business with foreign ownership, an LLC, especially with proper tax planning, might be the better choice.
Closing Lines
A proper business structure can result in a lot of savings in taxes. Foreign-owned single-member corporations or foreign-owned single-member LLC should be taken under careful consideration. Along with foreign-owned LLC taxation rules and special filings such as Pro Forma 1120.
At OptimizeTax, we ensure our clients are clear about these options. Our team works with you to ensure you follow IRS regulations, save as much as possible, and avoid mistakes that could cost you significantly.
Contact OptimizeTax today to get expert guidance on choosing the best tax structure for 2025.