Is an S Corp an LLC: Everything You Need to Know
Is an S corp an LLC? The answer is no. A limited liability Company (LLC) is different from an S corp., but they can be combined if you choose an S corp. tax classification for your LLC. 4 min read
2. S Corp Request
3. LLC and S Corp Similarities
4. LLC and S Corp Differences
5. Management Differences
Is an S Corp. an LLC?
Is an S corp an LLC? The answer is no. A limited liability Company (LLC) is different from an S corp., but they can be combined if you choose an S corp. tax classification for your LLC. An LLC is a legal entity created under state law that provides a number of personal protections to each member. The corporate structure gives your business personal protection, but it is easier to create than a corporation.
The IRS treats multi-member LLCs as a partnership, while single-owner LLCs are taxed as sole-proprietorships. With that, LLCs have the option of being taxed as an S or C corporation. This is attainable by filing an election document via the IRS, and you will receive the requested classification. The IRS will see your LLC as a corporation whenever you file your tax documents.
S Corp Request
Most LLC owners choose the default LLC tax structure. Like the LLC tax method, S corps most notably come with the pass-through tax system where income and losses pass from the LLC to individual members, allowing them to file such profit and losses on their tax returns.
Single-member LLCs can be taxed as a corporation or sole-proprietorship, while multi-member LLCs may be taxed as a corporation or partnership.
The IRS will grant your request if:
- Your LLC has less than 100 shareholders
- There are no nonresident aliens in your business.
- You have one type of stock (no preferred stock allowed)
- No Corporations or partnerships own a piece of your LLC
Most small businesses meet the aforementioned criteria, which is why many LLCs are granted S status.
LLC and S Corp Similarities
- Limited Liability Protection: Under both structures, members are not personally liable for any liabilities or debts incurred from the business
- Separate Business Entities: Both form distinct legal entities that are separate from the owners
- Pass-through Taxation: S corps and LLCs allow members to record profits and losses on their personal tax returns. Both entities do not face a double tax, as is the case with C corps.
- Mandated Requirements: Both Entities are subject to certain formalities, such as fees and filing annual reports
While an S corp can fall under an LLC, there are differences and similarities you should be aware of. Further, each state has its own rules regarding corporate law, which is why it is always best to contact an account or attorney to see which structure is ideal for your business.
Moreover, S corps and LLCs can take advantage of pre-tax expenses in the form of:
- Phone Bills
- Car Expenses
- Healthcare Costs
LLC and S Corp Differences
S corps differ from LLCs in regards to the employment status of the owners. LLC owners are taxed as a partnership, but are not considered employees of the LLC for tax reasons. In essence, the member is strictly the owner. On the other hand, an S corp owner who plays a major role in the corporation will be an employee and owner under tax guidelines. An S corp owner is the owner (shareholder) and an employee that performs vital duties for the corporation.
Unlike S corp, LLCs come with the following benefits:
- LLCs can have as many members as possible whereas S corps are restricted to no more than 100 shareholders
- Non-U.S. citizens can become members of an LLC. S corps do not allow non-U.S. citizens as members
- LLCs can be owned by other LLCs, corporations and partnerships
- There are no LLC restrictions on subsidiaries.
Further, S corps come with a number of restrictions in the form of:
- Adopting bylaws
- Stock issuance
- Annual meetings
- Recording meeting minutes
For LLCs, you may adhere to the following recommendations, but they are not mandatory:
- Drafting an Operating Agreement
- Issuance of Membership Shares
- Recording Annual Meetings
- Documenting Major Company Decisions
LLC owners can have managers who run various aspects of the LLC. The managers are also called members, and it is run like a partnership. If a team of managers run the LLC, it is more closely aligned with a corporation. However, they will not be involved in everyday business decisions.
S corps are governed by a board of directors, with officers managing the business. The directors reside over business affairs while making important decisions for the company. Instead, officers are managers who run the day-today operations.
Is an S corp an LLC? You can find out more by submitting your legal inquiry to our marketplace. UpCounsel’s team of top lawyers will assist you in deciding whether an S corp or LLC is the right choice for your business. Our lawyers will also guide you through the tax process, including any filing procedures you need to be aware of.