1. Choosing an LLC or an S-Corporation
2. Electing an S Status for an LLC
3. The Flexibility Benefits of an LLC

Compared to a limited liability company, S-corporations have more restrictions and requirements. However, an S-corporation also makes things easier in terms of self-employment taxes and ownership transfers. Both structures offer limited liability and pass-through taxation benefits.

Choosing an LLC or an S-Corporation

LLCs and S-corporations are two popular business designations that can offer business owners the protection of their personal assets from business debts and liabilities. Whether you are starting your business or just thinking about changing your business structure, the first step is determining which business classification is best for you.

Limited liability companies and S-corporations have many similarities and many differences to consider when choosing between them. Some similarities between LLCs and S-corporations include the following:

  • Both types prevent the liability of the company from passing to the owner.
  • Both are legal entities that are formed by state filings.
  • Both employ "pass-through" taxation, which has the income of the company flow through the business to be taxed on the owners' or shareholders' personal returns.
  • Both require ongoing reporting requirements, such as the filing of annual reports and annual fees.

While there are many similarities between the two business designations, they are also different in many ways:

  • LLCscan have as many members with as much ownership as the members wish to designate, while S-corporations have a maximum limit of 100 shareholders.
  • S-corporations require their shareholders to be U.S. citizens, while LLCs allow non-residents to be members.
  • LLCs can be owned by a number of entities, while S-corporation cannot have ownership from other S-corporations, LLCs, C-corporations, or some partnerships and trusts.
  • S-corporations require more ongoing formalities, such as adopting bylaws, issuing stock, holding director and shareholder meetings, and keeping minutes.
  • In an LLC, the company can be member-managed or manager-managed. In an S-corporation, the company will be run by directors and officers who will manage daily business affairs.
  • An S-corporation has a perpetual existence, while an LLC requires the listing of a dissolution date in its formation documents. If a member dies or withdraws, an LLC may dissolve.
  • Ownership in an S-corporation can be freely transferred as long as it follows the IRS restrictions for ownership. The transfer of ownership in an LLC requires approval from the other members of the LLC.
  • The self-employment taxes are more easily managed in an S-corporation. Since payment is made through a salary, most of the required taxes are paid through payroll. In an LLC, income will be subject to self-employment taxes, which can be much higher with FICA payments.

Electing an S Status for an LLC

To enjoy the best of both worlds, you can choose to operate your LLC with an S corporation election after setting up your company. This can be a popular choice for LLCs whose payroll taxes are extremely high. Both types will involve "pass-through" taxation to the owners of the company and provide liability protection. Some of the ways LLCs and S-corporations stack up against each other include the following:

  • An LLC is much easier for operation and administration.
  • An LLC has more flexibility for allocation profits to each owner.
  • An S-corporation provides for better flexibility in paying earnings to the owners either through salaries of distributions.
  • S-corporations are easier for tax planning purposes.

The Flexibility Benefits of an LLC

Sometimes an LLC will be the best choice for running your company due to the flexibility that it offers its members:

  • The "pass-through" taxation eliminates the double taxation of C-corporations.
  • Members have limited liability protection from legal action against the business or business debt.
  • LLCs are easy to operate and require fewer filing requirements, start-up costs, formal meetings, and recordkeeping requirements.
  • There is no limit on the number of members that can hold ownership in the LLC.
  • Ownership shares can be distributed how the members see fit and do not need to be based on the percentage of investment.

It is important to note that unless an LLC elects to be taxed as an S-corporation, one-member LLCs will be treated the same as a sole proprietorship for tax purposes. Those with more than one member will receive the same taxation requirements of a partnership.

If you need help with choosing between a limited liability company and an S-corporation, you can post your legal need (or post your job) on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.