We just got organized as an LLC...Should we opt to be treated like a default LLC or an 'S' Corp?
You might be a bit confused here. An LLC can elect to be taxed in one of two ways:
- Pass-Through taxation: In this case the LLC will be taxed like a partnership.
- Corporate taxation: In this case the LLC will be taxed like a C Corp.
So your choices are pass-through taxation or corporate taxation. An S Corp is a pass-through entity, so it is taxed like a partnership. By default, an LLC is taxed like a partnership (pass-through). So your question should really be, "Should we opt to be treated like a default LLC or a 'C' Corp?"
What's the most tax-efficient structure for us?
First, a little background for those that may not be familiar with these terms:
Pass-Through Taxation: The business profits and losses are passed through to the owners, and taxed at the owners' personal income tax rates. The taxation will occur even if no profits are distributed to the owners (i.e. all profits are left in the business bank account). For a bit more information on how pass-through taxation works, see this question Simple Overview of LLC Pass Through Taxation.
Corporate Taxation: The business is treated as a separate entity. As a result, the business will pay income taxes on profits at the corporate tax rate, which may be lower than the owner’s individual tax rate. On top of that, the owner will also have to pay income taxes on the portion of profits distributed to him, at his tax rate. This leads to the dreaded double taxation for the owner because he is paying taxes twice - once as personal tax, and once as corporate tax. This may sound bad, but there are cases where this may be the best choice. (There are also ways around this.)
So to answer your question, it depends. Generally speaking, from strictly an income tax point of view, I think startups with small profits tend to fare better with pass-through taxation (the default). However, there are many other factors involved in making this decision. You should definitely consult an accountant about your particular situation.