Compare LLC and S Corp

When you compare LLC and S corp structures, you’ll see there are differences and similarities, and the type you choose depends on your business goals and tax preferences. Overall, LLCs are easier to create, and there’s less maintenance and requirements involved to keep an LLC in good-standing with authorities.

For instance, LLCs can have an unlimited number of members, whereas corporate entities may be capped at 100. Many small business owners prefer the LLC structure because LLCs offer more flexibility. Another example is the case of record-keeping. Corporations are required to keep records of meetings and important management decisions. LLCs are not beholden to such standards.

Further, you may also establish an LLC while choosing an S corp tax structure. Unlike C corporations or an LLC, S corporations do not comprise a separate business entity. Instead, it refers to the method that the LLC is taxed.

Though states may have different requirements, an S corp and LLC are similar in the following ways:

  • Limited Liability Protection: Owners of a corporation or LLC are not held personally liable for any liabilities or debts from the company.
  • Separate Institutions: Both entities form a separate entity from the owners.
  • Ongoing State Requirements: Both entities are subject to certain formalities, such as paying regular fees and filing annual reports.
  • Deductions: Tax authorities allow S corps and LLCs to deduct pre-tax expenses. This can include computers, phone bills, advertising, health care costs, and uniforms.

Benefits and Drawbacks

The LLC process only entails a single-page registration if you are the sole owner. Further, LLC registration costs are relatively inexpensive, usually amounting to a couple hundred dollars, depending on state requirements.

With that, you must be aware of certain S corp restrictions from the IRS:

  • S corps are restricted to no more than 100 shareholders
  • Non-U.S. and residents cannot be shareholders
  • S corps cannot be owned by C corps, S corps, partnerships and LLCs

On the other hand, LLCs can:

  • Have non-U.S. citizens and non-residents become shareholders
  • Other business entities can own a piece of an LLC
  • LLCs can have subsidiaries with no restrictions

Guidelines and Recommendations

Overall, S corps operate under a formal system, whereas owners are free to tailor their businesses accordingly without restrictions. S corp. must adhere to the following guidelines:

  • Drafting Bylaws
  • Holding Annual Shareholder and Director Meetings
  • Recording minutes of meetings, along with keeping records
  • Issue Stock

LLCs should adopt the following guidelines, but they are not requirements:

  • Drafting an Operating Agreement
  • Issuing Member Shares
  • Holding and Recording Annual Member Meetings (including manager meetings)
  • Document all Major Business Decisions

S corps require more paperwork, but it allows you to keep track of your business operations while establishing documented proof of major company decisions. Moreover, such restrictions allow shareholders to know that the company is legitimate and that the company has a clear direction. In addition, keeping extensive documentation is also useful for liability and tax reasons.

Member-Managed vs. Manager-Managed LLC

Under a member-managed LLC, it is governed in the same manner as a partnership. On the other hand, a manager-managed LLC is like a corporate structure, where members are not involved in daily management decisions. With that, certain states may mandate that LLCs have a dissolution date when filing documents. In many cases, however, the withdrawal or death of a member would be enough to dissolve an LLC. S corps, on the other hand, exist in perpetuity with no dissolution requirement.

S Corp Advantage

S corps come with some leeway, such as the free transfer of stock, so long as ownership restrictions under the IRS are met. LLC membership is usually not transferable unless the transaction gains approval from other members.

Entity Taxation

All business entities are taxed on net profit or loss, which is calculated by factoring sales minus allowable deductible expenses. For tax reasons, the IRS classifies businesses in the following manner:

The IRS taxes single-owned LLCs as sole proprietorships, while multi-member LLCs fall under partnership classification. However, LLCs can decide on a C or S corp tax classification. Regardless, LLC taxes paid on the owner’s individual tax returns instead of the LLC itself being taxed. LLCs do not pay taxes. S corps generally pay more taxes due to the addition of state corporate and payroll taxes.

If you need to compare LLC and S corp structures, submit your legal inquiry to the UpCounsel marketplace. UpCounsel lawyers will help you find the best structure that matches your business needs, including tax advantages that you can use to your benefit. Our lawyers will also help you through the LLC filing process if you are starting an LLC or corporation for the first time.