What’s The Difference Between an LLC and S Corp?

The difference between an LLC (Limited Liability Company) and an S Corporation (S Corp) lies primarily in taxation status and ownership structure, among other factors. Both provide limited liability protection to their owners but differ in management and tax implications.

LLC (Limited Liability Company)

• Ownership and Management: LLCs offer flexible ownership, allowing one or more individuals or entities to own the company with no limit on the number of members. Management can be either member-managed or manager-managed.

• Taxation: LLCs are typically pass-through entities for taxation purposes, meaning the business does not pay income taxes. Profits and losses are passed through to the members, who report them on their personal tax returns. An LLC can elect to be taxed as a corporation.

• Regulatory Requirements: LLCs generally face fewer formalities and regulatory requirements than corporations. There is no need for a board of directors, annual meetings, or minutes, making it suitable for smaller businesses seeking flexibility.

S Corporation (S Corp)

• Ownership and Management: S Corps requires adherence to corporate formalities, including having a board of directors and holding annual shareholder meetings. Ownership is restricted to no more than 100 shareholders, who must be U.S. citizens or residents.

• Taxation: S Corps are pass-through entities for federal taxes, so the corporation does not pay income tax. Shareholders report their share of profits and losses on their personal tax returns. S Corps can pay shareholders salaries and distribute dividends, potentially leading to different tax implications.

• Regulatory Requirements: S Corps face stricter regulatory requirements, including filing articles of incorporation, adopting bylaws, issuing stock, and keeping meeting minutes.

Key Differences

• Tax Flexibility: LLCs have greater tax flexibility, being able to choose their tax status. S Corps have specific qualifications for their tax status.

• Ownership Restrictions: S Corps have strict limitations on the number and type of shareholders, unlike LLCs.

• Operational Requirements: S Corps are subject to more stringent operational requirements, such as holding annual meetings and maintaining minutes, which are not required for LLCs.

• Self-Employment Taxes: S Corp shareholders can benefit from potentially lower self-employment taxes through salaries and dividends, a structure not available to LLC members, depending on the situation.

Choosing between forming an LLC or an S Corp involves evaluating the business's specific needs, including tax treatment, investment considerations, and desired operational complexity. It is advisable to seek advice from a tax advisor or legal professional to determine the best fit for the business context.