Compare LLC to S Corp: Everything You Need to Know
To compare LLC to S corp is to compare two popular business models that are used to organize businesses, each with their own advantages and disadvantages.3 min read
To compare LLC to S corp is to compare two popular business models that are used to organize businesses, each with their own distinct advantages and disadvantages. The LLC—or limited liability company—is a business model that offers great flexibility on a number of levels, including management and structure. The S corp—or S corporation—on the other hand, is not a type of business model, nor even a corporation, but rather a tax election that one takes with the IRS, and whose main draw is the tax advantages it receives.
Naturally, there are other advantages and differences than these, and the laws and regulations of each state may further expand these differences. Furthermore, what business structure you choose will greatly influence the direction of your company and what business issues you will face, including those related to liability, taxation, and management. All this can make the choice a very daunting one indeed, and so it is best to consider every aspect carefully—perhaps with expert counsel—before making a choice.
LLC or S Corp? The Similarities
Unsurprisingly, since they are both LLCs, there are many similarities between a pure LLC and an LLC with S corp election. Some of the main ones include:
- Limited liability protection. In both LLCs and S corps, the owners generally are protected from personal liability related to business debts or legal issues. With both, only your company assets will be at risk.
- Entity separation. Related to this, both LLCs and S corps are legal entities separate from what you created in a state filing. From this stems the limited liability, as you are not considered to be one with your company in the eyes of the law.
- Pass-through taxation. LLCs and S corps both receive pass-through taxation, meaning that taxes on company profits and losses are not paid at the business level but rather passed through to your personal tax return.
- Ongoing state requirements. LLCs and S corps must both deal with state-mandated formalities, like paying necessary fees and filing annual reports.
LLC or S Corp? The Differences
Of course, there are major differences between these two business structures, as well. The main ones pertain to:
- Ownership. With LLCs there is no ownership restriction, while with S corps there is. Limits on S corps include that they can have no more than 100 owners, that these owners cannot be non-U.S. citizens or most business entities, and that S corps cannot subsidize without restriction.
- Formalities. S corps must deal with many more internal formalities, while internal formalities may be recommended to LLCs, but are not required. S corp formalities include issuing membership shares, creating an operating agreement, running and recording annual meetings, and recording all important company decisions.
- Management. LLC owners can decide to be member managed or manager managed. If the former, the members will run their own affairs; if the latter, they designate managers to deal with the day-to-day issues. In contrast, C corps must include a board of corporate officers and directors. The directors deal with management and major company decisions, while the officers focus on the day-to-day issues.
- Existence. S corps enjoy perpetual existence, while LLCs may be required in some states to choose a dissolution date, and certain events, like the withdrawal or death of a member, can lead to an LLC's dissolution.
- Ownership transferability. S corps can transfer their stock freely within the confines of IRS restrictions. LLC membership generally is not transferable without the approval of the other members.
- Self-employment taxes. S corps enjoy better self-employment tax treatment than LLCs because in S corps, the owner can be considered an employee and be paid a salary as such. This salary will be subject to FICA taxes, but whatever profits come after will not be. The only catch is that this salary must be reasonable—the IRS checks for abnormally low salaries.
- Set-up. LLCs generally have short filing forms with low filing costs; S corp organization can be much more complicated.
- Guidelines. LLCs also have less guidelines to follow than S corps, which can yield savings for owners in the realm of attorney and accountant fees.
- Accounting. LLCs are usually required to use accrual accounting and cannot use cash basis accounting. S corps have the freedom to choose either option.
As can clearly be seen then, there are many issues to consider when choosing between the LLC and S corp designation. If you need help understanding the issues related to what it means to compare LLC to S corp, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.