Ok, so you are thinking of creating a business entity in Ohio and you are thinking to yourself, why in the world would anyone choose an LLC over an S Corp? Well, the short answer is that generally one would not. However, there can be substantial advantages to having an S-Corp as opposed to an LLC in certain circumstances, one such advantage being savings on social security taxes.
Typically, if you earn at least $200,000 a year as a sole proprietor you will pay self–employment tax is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
Maximum earnings subject to SE tax. Only the first $102,000 of your combined wages, tips, and net earnings in 2008 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.
Obviously this tax can be substantial under a pass through taxation entity such as a sole proprietorship or limited liability company.
But one can go ahead and actually incorporate that entity as an S corp. Then, instead of paying out a large lump salary to the owners or members, the owner would actually get what’s called ‘reasonable compensation’ and would end up paying Social Security tax, which is the equivalent on that reasonable compensation, and take the rest as corporate distributions and not pay any self–employment tax on that portion. You just have to run the numbers and figure out what fits your specific situation and requirements.