Is an LLC an S Corp?

Is an LLC an S corp? That is a common question for those looking to form a new business, and it pertains to the easily confused nature of these two similar but different business models. An LLC, or a limited liability company, is a legal entity created under state law in order to operate a business. An S corp, or S corporation, on the other hand, is not a true corporation but merely a tax designation elected with the IRS after the creation of an LLC. So, to answer the question then: is an LLC an S corp? Not necessarily, but an S corp is always an LLC.

The question that then follows for the aspiring business owner is whether they should elect to run an LLC or an S corp, if they are choosing between the two. Unfortunately, there is no clear cut answer, because it will depend on your personal situation and what you want from your business. Each form has its own advantages and disadvantages as well as many similarities and differences. Also, there may be different rules for LLCs and S corps depending on what state you are in. For this reason, it is recommended that you consult an accountant or attorney before making this very important business decision.

Similarities Between LLCs and S Corps

As is perhaps no surprise due to the confusion between these two business models, LLCs and S corps have many similarities. The main ones pertain to:

  1. Limited liability protection. Both offer their owners legal protection, or limited liability, from legal proceedings and debts related to their LLC. Personal assets are safe from legal action or debt collection.
  2. Pass-through taxation. Both are generally considered pass-through entities, meaning that no income tax is paid at the business level. Instead, profits and losses are passed through to the tax returns of the individual owners.
  3. Ongoing state requirements. Both must comply with state-mandated formalities like filing annual reports and paying any fees they are subject to.

Differences Between LLCs and S Corps

As LLCs and S corps have many similarities, so too do they have many differences. The main ones pertain to:

  1. Ownership. The IRS restricts ownership in S corps but not LLCs. S corps cannot have more than 100 owners, cannot have non-U.S. residents or citizens as owners, and cannot be owned by other S corps, C corps, LLCs, partnerships, and most trusts. S corps also cannot have unrestricted subsidies.
  2. Formalities. S corps must comply with many formalities, while LLCs do not. S corp formalities include issuing stock, adopting bylaws, holding shareholder and director meetings, and maintaining minutes of all meetings. LLCs are merely recommended to maintain some formalities, such as creating an operating agreement, issuing shares to members, and holding member meetings.
  3. Management. LLCs are either member managed or manager managed. Member management is similar to running a partnership while manager management is similar to running a corporation. S corps are run by officers and directors. The former run the day-to-day affairs while the latter oversee business affairs and major decisions.
  4. Existence. S corps exist without threat of dissolution; LLCs may dissolve due to certain events, like the withdrawal or death of a member.
  5. Ownership transferability. S corp stock can be transferred freely, so long as these transfers meet the IRS’s ownership restrictions. LLC membership interest usually cannot be transferred freely; in most cases, the other members must approve of it.
  6. Self-employment taxes. S corps enjoy several self-employment tax advantages not available to LLCs. They have better self-employment tax rates due to FICA taxes being withheld and paid on the S corp owner’s salary rather than corporate earnings, they are not required to pay employment taxes on distribution, and they are the only business model that allows owners to save on Medicare and Social Security taxes.

From this brief overview, it is easy to see that the choice between an LLC and an S corps may very well be a complicated one, subject to many factors that are unique to each aspiring business owner. If you need help understanding the question of is an LLC an 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.