Should I Start an S Corp vs LLC as a Landscaper?
If you’re a landscaper with a sole proprietorship or a partnership, you may be wondering, should I start an S corp vs LLC as a landscaper? You can start an LLC and elect S corporation (S corp) status for your business. Formalizing your business will provide you with added security such as personal liability protection, credibility for your company, and even lead to tax savings.
An S corp, also known as Subchapter S, is not a business structure, but rather a tax status for an LLC or corporation under the Internal Revenue Service (IRS) Chapter 1 code. Many small business owners elect S corp status for its tax advantages and other benefits.
If you’re a landscaper, read ahead to learn more about why, when, and how to start an S corp; S corp tax advantages, and what makes more sense for your landscaping business if you’re debating between starting an S corp vs LLC.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
What Is an S Corporation?
An S corporation (S corp) is a tax classification under the Internal Revenue Service (IRS), Subchapter S. An S corp is the preferred tax status elected by many small business owners who are ready to formalize their sole proprietorship or partnership, as well as limited liability companies (LLCs) and corporations that elect S corp status for its tax benefits.
S corporations have state and formation fees, annual costs, and S corp requirements mandated by the IRS (covered in this guide) that you should learn about before considering electing S corp tax status for your landscaping company.
As a landscaper, you could be leaving cash on the table by paying more on self-employment taxes. Find out ahead if an S corporation makes sense for your business based on your company finances and what type of tax advantages an S corp can provide your business.
Key Takeaways:
- An S corporation is a tax classification and not a business structure
- To elect S corp status, you must first have a formal, legal business structure (i.e. LLC or a corporation)
- Your business must meet specific S corp requirements (e.g. must have no more than 100 shareholders who are US citizens or permanent resident aliens)
- Business owners choose S corps to save on self-employment taxes on distributions
- S corps generally don’t pay taxes at the corporate level since they have pass-through taxation (profits, credits, losses pass directly to shareholders)
- S corp owner/shareholders pay taxes on their personal income tax return at their regular income tax rate
- You should start an S corporation if you receive $20,000 in annual distributions after calculating net profits and paying owner salaries
Why Should I Elect S Corp Status as a Landscaper?
In an S corp, business owners are considered salaried employees for tax purposes. An S corp has pass-through taxation just as in a sole proprietorship, partnership, and an LLC. However, as salaried employees, landscapers are able to save on self-employment taxes on the distributions that pass to the owner as net profits (profits after business expenses such as salaries and other business costs).
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What Is Pass-Through Taxation?
Pass-through taxation is when profits, credits, losses, and distributions are passed on to a business owner/shareholder. Generally, businesses with pass-through taxation do not pay taxes at the corporate level. These include sole proprietorships, partnerships, and default LLCs as mentioned previously, as well as LLCs and corporations that elect S corp status.
In some states, such as California and New York, S corps are subject to state and local taxes, so make sure to read our state guides to find out more about electing S corp status in your specific state and region.
What Are the S Corp Requirements?
The IRS has requirements your company must meet before becoming eligible for S corp status. The following are S corp requirements you’ll need to start an S corp:
- 100 shareholders or less
- Must be a domestic LLC or corporation
- Issue only one class of stock
- Shareholders are US citizens or permanent resident aliens
- Are owned by private individuals
What Is an S Corp Reasonable Salary?
The IRS pays close attention to the salary a business owner is paid in an S corporation to make sure that it is within the standard for the industry, position held, and level of expertise. The expectation is that the salary is reasonable and the owner is not reducing the salary to avoid paying more on taxes. As long as you ensure that your salary is in line with your position, you should be all set!
That said, you can look on websites like Glassdoor to get a more accurate salary range based on your specific state. If you work as a landscaper outside of the country, you can use the average salary for your job in the state where you founded your S corp.
What Happens If I Don’t Pay Myself a Reasonable Salary?
If you’re paying yourself a $30,000 salary and the company’s net profits are $120,000, the IRS may come knocking on your door, which may lead to fines and a loss of your S corp status. If you lose the S corp status, you’d have to pay the additional taxes for a default LLC or at the corporate level as a C corp if you have a corporation. In other words, you’d lose out on the S corp perks and end up paying significantly more on taxes.
What Are S Corp Tax Advantages for Landscapers?
An S corp has tax advantages, such as pass-through taxation, since the business itself does not pay taxes at the corporate level. Some states like California require a 1.5% franchise fee or at least a minimum of $800 and New York imposes a tax on S corps.
Pass-through taxation allows the shareholders to pay taxes on their personal income tax return at their individual tax rate just as in a sole proprietorship, an LLC, or a partnership. The difference is that a landscaping company taxed as an S corp breaks down an owner’s taxes into two portions — salary and distributions. Both of these are taxed differently.
- The salary portion, pays taxes on:
-
- Self-employment taxes (Medicare and Social Security taxes)
- Income tax
- The distributions portion, is only subject to:
-
- Income tax
Since an S corporation does not pay taxes at the corporate level as in a default corporation (C corp) and the distributions are not subject to paying self-employment taxes as in a default LLC, sole proprietorship, or a partnership, an S corp can save you a significant amount of money under the right business conditions.
Remember to check for specific S corp taxes imposed on your landscaping company depending on the state you live in as mentioned previously. You’ll also have to check your business finances to decide for yourself if the savings are enough to offset the costs of owning an S corp. We generally recommend electing S corp status if you make $20,000 in annual distributions (explained further below).
Limited Liability Protection
Another S corp perk is limited liability protection. Since LLCs and corporations are formal business entities, an S corp by default offers a landscaping company owner the limited liability protection these business structures are known to provide. This means that if your landscaping company is sued or creditors come after your business to pay owed debts, your personal assets (cars, houses, etc.) are protected.
Ready to get started?
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When Should I Elect S Corp Status as a Landscaper?
We recommend that you elect S corp status as a landscaper when your business makes a minimum of $20,000 in annual distributions after business expenses and paying a reasonable salary. In addition, if you do not plan on reinvesting the money in your business, then an S corp may be the right choice for you.
S Corp vs LLC
When it comes to making a decision to elect S corp vs LLC as a default tax entity, you’ll have to evaluate what makes the most sense for your business.
S Corp
For example, if you're making at least $60,000 in net earnings as a landscaper and are paying yourself a $40,000 salary, you would be receiving $20,000 in distributions. Net earnings are profits after annual expenses, such as internet bill, mobile phone, physical location, salary taxes, and any other business costs. The $20,000 distributions in this example would only be subject to income tax in an S corp, meaning you would not pay self-employment taxes on that entire amount.
Default LLC
In contrast to an S corp, in a default LLC, a sole proprietorship, or a partnership, you would have to pay both self-employment taxes and income tax on the $20,000 distributions in the example above. Self-employment taxes (Social Security and Medicare) are calculated at around a 15% rate. The amount you save from S corp tax savings can help you offset annual S corp fees, while still leaving money in your pocket.
Since an S corp isn’t taxed at the business level, you also wouldn’t have the flat-rate tax that is imposed on a C corporation (C corp), which is the default corporation tax status.
S Corp Example Recap (With Different Numbers)
$80,000 (business revenue) - $50,000 (reasonable salary) - $10,000 (business expenses) = $20,000 (distributions)
Taxes imposed on the $50,000 salary:
- Self-employment taxes
- Income tax
Taxes imposed on the $20,000 distributions:
- Income tax only
- No self-employment taxes (Medicare and Social Security taxes)
Default LLC Example Recap
In contrast to an S corp, taxes for a default LLC, sole proprietorship, and partnership:
$100,000 (business revenue) - $0 (no owner salary) - $10,000 (business expenses) = $90,000 (distributions)
Since the entire $90,000 difference becomes the distribution, the entire $90,000 amount is subject to both:
- Employment taxes
- Income tax
Conclusion: LLCs, sole proprietorships, and partnerships pay more in taxes on the distributions whereas S corps can save you around 15%.
Calculate your potential tax savings by using our S Corp Tax Calculator to see if you should elect an S corp status for your business.
What Is the Difference Between an S Corp and a C Corp?
The classification S corporation or C corporation is an elected tax designation. This means that a corporation can be either taxed as an S corp or a C corp. The tax status you elect depends on what makes the most financial sense for your landscaping company.
C Corporation
A C corporation is known for its double taxation. In a C corp, the business pays a corporate flat-rate tax (currently 21%) and the shareholders are then taxed on their individual distributions on their personal income tax return. The idea of a C corp’s double taxation makes an S corp the better choice for most business owners.
A C corp does not have the type of restrictions that an S corp has such as a maximum number of shareholders or one type of stock, to name a few. Also, if your goal is to grow your business and go public, a C corp may be the best choice for your business.
S Corporation
An S corporation does not have double taxation like a C corp. Instead, an S corp has pass-through taxation, which means that your landscaping company would not be taxed at the corporate level (with a few states as an exception). The distributions will only be taxed on your individual income tax rate. You’ll also be paid a salary, which can save you money on self-employment taxes through the distributions.
Another difference between an S corp and a C corp is that an LLC can also elect to be taxed as an S corp. You can always start as an S corp LLC and then convert to a C corp.
We recommend that you elect S corp status after starting an LLC instead of a corporation. Depending on your landscaping business’s finances, a corporation can cost more and have more government oversight. It can also demand more from its owners.
How to Start an S Corp for My Landscaping Company
Electing S corp status for your business requires starting an LLC or a corporation. Next, you’ll have to confirm that your landscaping company meets the IRS S corp requirements. If you are eligible to apply for S corp status, you’ll have to fill Form 2553. In New York, for example, you’ll have to also complete and submit Form CT-6 with the New York Department of Taxation and Finance to be taxed as an S corp.
If you need a unique and catchy name for your S corp, check out our free Business Name Generator, where you’ll receive a discount when purchased as a domain name if you need one for your website. You can also create your own logo with our Free Logo Generator, where the download is free for you to keep or do as you wish.
FAQ
An S corp is a tax classification assigned by the IRS that allows a business owner to become a salaried employee. The salary portion pays self-employment taxes and income tax while distributions are only subject to income tax.
Since S corp business owners don’t pay self-employment taxes on distributions, many small businesses elect this tax status for its potential tax savings.
An S corp isn’t taxed at the corporate level like C corps. Also, S corp owners save money on taxes since distributions are only subject to income tax and not self-employment tax.
No. An S corp is a tax classification that formal business structures, such as LLCs and corporations, elect for their tax benefits.
Limited liability protection means that the business is a separate entity from its owners. As such, the business owner’s personal assets (houses, cars, etc.) are protected in case the business is sued or debt collectors need to be paid.
However, the owner must ensure to protect the company’s corporate veil.
Yes, an S corp is either an LLC or a corporation by default that elect to be taxed as an S corp. Both an LLC and a corporation have limited liability protection since they are formal business structures.
Pass-through taxation means that the business’s profits, credits, losses, and distributions are funneled directly to the owner/shareholder’s personal tax return to be taxed at their individual tax rate. In pass-through taxation (with a few exceptions such as New York, California, and Texas) the business itself isn’t taxed.
Yes, an S corp is a pass-through taxation entity with profits, credits, losses, and distributions passed down to the owner/shareholder.
Both S corp and C corp are tax classifications. However, there are a few differences between an S corp and a C corp.
S corp
An S corp is a pass-through entity that can be elected by an LLC or a corporation. Owners are considered salaried employees for tax purposes and distributions are only subject to paying income tax and not self-employment tax, saving the company money on taxes.
S corps also have some IRS restrictions and requirements to qualify. Some of these include a maximum of 100 shareholders, owners must be US citizens or permanent resident aliens, all agree on S corp status, cannot be owners by other businesses, among other requirements.
There are some exceptions to this, but generally S corps are not taxed at the business level.
C corp
A C corp is known for double taxation. The business itself is taxed at a flat tax rate and the shareholder distributions are then subject to self-employment taxes and income tax, increasing the tax burden. C corps don’t have the restrictions that S corps have, but carry a heavier regulatory oversight than an S corp.
According to the IRS, the following are S corp requirements:
- 100 shareholders or less
- Must be a domestic LLC or corporation
- Issue only one class of stock
- Shareholders are US citizens or permanent resident aliens
- Owned by private individuals
An LLC is a legal business structure and an S corp is a tax classification that an LLC or a corporation can elect.
Yes. You can start an LLC and elect to be taxed under the S corp classification.