1. Main Similarities of an LLC and S Corporation
2. Qualification for S Corporation Status
3. Limitations of LLCs
4. Management and Operation of LLC and S Corporations
5. Taxation of an LLC vs. S Corporation
6. Tax Reporting for S Corporations and LLCs

This S Corporation vs. LLC chart shows some of the main differences between an LLC and S corporation.

  • S corporations are more restrictive on who the owners and shareholders can be.
  • S corporations are required to pay a salary to owners who own more than 2 percent of the company and work there.
  • S corporations are required to maintain and file formal records for the shareholder and board meetings.
  • S corporations are only allowed one class of stock.
  • It is easier to set up stock options for employees with S corporations.
  • LLCs are not obligated to pay a salary to their owners.
  • LLCs have tax implications for companies such as single-person ventures.

Main Similarities of an LLC and S Corporation

  • Both include limited liability protection. Owners aren't personally responsible for debts and liabilities related to business.
  • Both are separate legal entities with state filing.
  • Both are pass-through tax entities. However, while S corporations have to file a business tax return, LLCs only file business tax returns if they have more than one owner. 
  • With pass-through taxes, no income taxes are paid by the business.
  • Business profits and losses are passed through to the owners' personal tax returns and paid by the business.
  • Both are subject to state-mandated formalities, like filing annual reports and paying associated fees.

Qualification for S Corporation Status

In order to be treated as an S corporation, several requirements must be met:

  • Must be an eligible entity, such as a domestic corporation or a limited-liability company
  • Must have only one class of stock
  • Must not have more than 100 shareholders

Spouses are treated as a single shareholder. Families, as in individuals descended from a common ancestor, as well as spouses and former spouses of the common ancestor or other relatives, are considered a single shareholder, provided they choose to be. 

Shareholders must be U.S. citizens or residents and must be physical entities, so corporate shareholders and partnerships aren't included. That said, certain tax-exempt corporations, such as 501(c)(3) corporations, are permitted to be shareholders.

Profits and losses must be allocated to shareholders, proportionate to their shares.

If an S corporation doesn't meet these requirements, it will lose its S corporation status and become a C corporation.

Limitations of LLCs

LLCs can have different classes of stock, but this requires complex operating agreements. Corporate law is more established, which means that investors and venture capitalists prefer to invest in them. 

Setting up employee stock options is also more complicated with LLCs. S corporations only have one class of stock, however, which causes companies to decide to lose their S corporation status to accept investments, since investors usually want preferred stocks.

Management and Operation of LLC and S Corporations

S corporations and C Corporations are managed by a board of directors, which are elected by the company shareholders. The daily operations are managed by officers who have been appointed by directors.

LLCs can be managed by either members or a management team. This flexibility is similar to a partnership and leaves the LLC to appoint management. 

Taxation of an LLC vs. S Corporation

Certain tax aspects, such as employee Medicare and FICA taxes, are unaffected by the corporate structure, but federal income tax is different for LLCs and S corporations.

The corporate tax rate is lower than the personal income tax rate, in most cases. In C corporations, however, there is a double taxation from the corporation's profits and the shareholders' or owners' dividends. S corporations can bypass this by reporting the entire income on each of its shareholders' personal income tax returns. This is proportionate to the ownership of each shareholder. This method also means that the company losses can be reported on personal income tax returns, which reduces the S corporation's tax liability. More information about S corporation tax liability can be found here.

In contrast, C corporations take their losses forward to offset them against the company's future profits.

Tax Reporting for S Corporations and LLCs

S corporations have shareholders report their income on Form 1120S, their salaries on Form W-2, and profit distribution on Schedule K-1.

LLCs have members report income on their personal tax Form 1040 Schedule C, or Form 1065 and Schedule K-1 for their profit distributions. LLCs also have the option of being taxed as a C or S corporation. If they choose to do so, tax reporting is on Form 1120 for income, salaries are on Form W-2, and profit distribution is on Form 1099-DIV.

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