LLC or S-Corporation? Here are some US Individual tax impact you may want to consider

Entrepreneurs and real estate investors frequently turn to Limited Liability Companies (LLCs) for their versatility, liability safeguards, and estate planning benefits. As a preferred structure for new businesses and property ownership, LLCs can offer substantial advantages. However, they are not universally suitable—without strategic planning, they may create compliance risks or result in missed opportunities.

LLCs provide adaptability and liability protection, yet their tax benefits are frequently misinterpreted. In reality, forming an LLC doesn’t automatically translate into tax savings. However, when integrated into a carefully designed strategy, it can serve as a valuable financial tool. Here are some key benefits:-

  1. Liability Protection – Owners are generally not personally responsible for business debts and liabilities, reducing personal financial risk.
  1. Tax Flexibility – LLCs can choose how they are taxed—either as a sole proprietorship, partnership, or corporation—offering potential tax advantages depending on the structure.
  2. Operational Flexibility – Compared to corporations, LLCs have fewer formalities and administrative requirements, making them easier to manage.
  3. Credibility – Having an LLC can enhance a business’s professional image and legitimacy in the eyes of customers and investors.
  4. Estate Planning & Asset Protection – LLCs can be structured to facilitate succession planning and protect assets from certain liabilities.
  5. Pass-Through Taxation – In most cases, profits and losses pass through to the owners’ personal tax returns, avoiding double taxation.
  6. Customizable Ownership Structure – Members can define ownership percentages, voting rights, and management roles to fit their needs

LLCs are pass-through entities by default, meaning the business income is reported on your personal tax return. However, there are different treatment for different types of income, you may refer to the below table:-

Operational   Investment – Passive
Income Type Ordinary Income
Services
Commissions
Sales		 Passive Income
Rental property
Royalties
Dividends
SE Tax Implication Subject to self-employment (SE) tax Not subject to SE tax
Single Member LLC Schedule C / Form 1040 Schedule E / Form 1040
S-Corp election Schedule C, then Form 1120S Schedule E / Form 1040

 

More information on who is considered as self-employed and taxes applicable on self-employment income could be found here: https://americanpacifictax.com/taxes-applicable-on-self-employed-income/

When Should You Consider an LLC?

An LLC may be the right choice if:

  • You own rental property and need liability protection from potential property-related risks.
  • You operate a business generating ordinary income and plan to elect S-Corp status later to minimize self-employment tax.
  • You are entering a business partnership and require clear documentation of ownership, responsibilities, and profit distribution.
  • You want to incorporate your business or real estate into your estate plan, such as by holding ownership within a revocable living trust.

Single-Member LLCs

A Single-Member LLC (SMLLC) is an LLC owned by an individual or entity. It is one of the most common structures for wealth management clients due to its simplicity and liability protection. However, the IRS classifies an SMLLC as a disregarded entity by default, meaning its profits and losses are reported directly on the owner’s personal tax return—typically on Schedule C for business income or Schedule E for rental income.

 

Disclaimer: This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors or consult us regarding your own personal tax situation as this article was intended to be general in nature.

If you’re a foreign owner of US LLC the rules can become extremely complex and be sure to seek appropriate tax and legal assistance. If you would like to learn more about the US tax impact in setting up a business or company, feel free to contact us.