S-Corps vs. Single Member LLCs: Which to Choose as a High Net Worth Entrepreneur Starting a Business

As a high-net-worth individual starting a company, deciding on your legal business structure is an extremely important choice. It will affect your income taxes, retirement savings, and overall financial life. It’s important to ensure that you're setting yourself up for success not just in the short term but also for the long haul.

Two of the most popular business structures for entrepreneurs are S Corporations (S-Corps) and Single Member Limited Liability Companies (Single Member LLCs). Both options provide advantages, but they are also quite different when it comes to taxes, liability, and how they fit into your overall financial strategy.

An S Corporation is a unique type of business because it allows owners to avoid double taxation on corporate income. Traditional corporations (i.e. C-Corps) owe a “double tax.” This is because the corporation itself pays corporate income tax on its net income (tax #1), then shareholders have to pay personal income taxes on their dividends (tax #2). However, through S-Corp status with the IRS, the corporation is only taxed once. The corporation avoids the federal income tax by passing income to the shareholders. Then, the shareholders report it on their personal tax returns.

To qualify for S-Corp status, a company must meet 3 requirements. It cannot have more than 100 shareholders (who all must be U.S. citizens or residents). Also, it must only have one class of stock. Lastly, all shareholders must be individuals (certain trusts and estates can qualify, but no partnerships or corporations).

A Single Member LLC is also a pass-through entity (aka no corporate taxes are owed). It usually is treated as a disregarded entity, meaning that in the eyes of the IRS, it doesn’t exist separately from its owner. So, all profits and losses are reported directly on the owner’s personal tax return. In a Single Member LLC, the owner has personal liability protection, meaning that their personal assets are (generally) protected from business liabilities. (Note: while a Single Member LLC reports its income on the owner’s tax return, it is possible to have a Single Member LLC with S-Corp status, therefore spreading the taxable income from just the owner to all shareholders).

While both have their own advantages, their distinct tax implications are a major reason entrepreneurs may choose one over the other.

Again, an S-Corp’s income is passed through to the owners, meaning the business itself does not pay federal income taxes. The owners report their share of the S-Corp’s income on their personal tax returns, avoiding double taxation. Many small business owners with an S-Corp appreciate not paying the double tax since they and their business partners may be the only shareholders. Through S-Corp status, business owners can pay themselves a salary and take the remaining income as distributions. The salary is subject to payroll taxes (Social Security and Medicare), but the distributions are not. This can reduce overall tax burden, especially with a highly profitable business.

Single Member LLCs are considered disregarded entities by the IRS. The LLC’s income, deductions, and credits are reported on the owner’s personal tax return using Schedule C. While this is pretty straightforward, the self-employment taxes apply to the entire income of the business, including salary and profits. This can result in higher taxes, especially if the business is highly profitable. However, since a Single Member LLC owner can choose (if meeting the necessary requirements) for their business to be taxed as an S-Corp, this allows them to pay themselves a salary and take additional income as distributions, reducing self-employment taxes.

Another reason an entrepreneur may choose one structure over the other is due to liability protection. Both S-Corps and Single Member LLCs offer liability protection to their owners. So, as the owner, your personal assets (home, savings, etc.) are generally protected from business-related lawsuits or debt.

If an S-Corp is sued or incurs debt, the personal assets of the shareholders are protected, unless an individual personally guarantees a loan or is found guilty of misconduct.

A Single Member LLC provides liability protection for the owner since it is considered a distinct legal entity, separate from its owner. However, to maintain this protection, the LLC must be in good standing with the state, follow proper corporate formalities, and maintain a clear distinction between personal and business finances.

Administrative responsibilities are another reason owners may choose one business structure over the other.

Setting up an S-Corp is a more formal process. First, you need to incorporate your business in your state, then file IRS Form 2553 to elect S-Corp status. It requires ongoing administrative work like keeping detailed records, holding annual meetings, and filing complex tax forms.

Conversely, establishing a Single Member LLC is quicker. In most states, you only need to file Articles of Organization with the Secretary of State. This is a relatively simple process. Also, LLCs don’t have as much required ongoing paperwork. However, we do recommend keeping proper business records and separating your personal and business finances.

Both an S-Corp and Single Member LLC have a variety of pros and cons. Any entrepreneur must consider their own business and which structure would be best for them. That being said, there are some key distinctions that could help you decide.

An S-Corp may be a better decision for you if:

• Your business is profitable and you want to take advantage of the tax savings associated with distributions. By paying yourself a reasonable salary and taking the rest of your earnings as distributions, you can reduce your self-employment tax liability.

• You plan to expand your business. This could be growth by planning to bring on more shareholders (remember – 100 shareholder spaces) and wanting to have the ability to issue stock.

A Single Member LLC may be a better decision if:

• You are new to owning a business and don’t have extensive admin resources, since LLCs are easier to set up and maintain.

• Your business isn’t highly profitable.

• Your primary concern is asset protection and you want personal liability protection.

However, choosing between an S-Corp and a Single Member LLC isn’t just about taxes and liability protection in the short term. This decision also has long-term implications in your financial planning.

As a high-net-worth entrepreneur, you’re likely looking to grow your wealth and plan for retirement.

With an S-Corp, you can set up retirement plans like a Solo 401(k) or a SEP IRA, both which allow for significant contributions. [Solo 401(k) contribution limits in 2024 were $23k, and a SEP IRA had a max contribution of $69k (or 25% of compensation) in 2024]. Your salary can be used to fund these accounts, helping you grow wealth (tax-deferred) for your retirement.

In a Single Member LLC, it can be difficult to maximize retirement savings since you can’t treat a portion of your income as distributions. So, your full income is counted toward self-employment tax. However, if the LLC chooses to be taxed as an S-Corp, the above retirement planning opportunities are available.

As an entrepreneur, it can be easy to overlook the importance of selecting the right type of business structure that has both short-term and long-term benefits. There is no perfect solution, but by considering tax implications, administrative requirements, liability protection, retirement planning concerns, and your business’s profitability/growth plans, you can choose whether an S-Corp, Single Member LLC, or other business structure is best for you and your financial plan.

As always, we recommend working with a professional who understands both tax strategies and wealth management.