LLC and S Corp: Everything You Need to Know
An LLC and S corp are two different ways to structure a business. Both have their advantages and disadvantages and depending on what your business goals are, and one may be better suited for you than the other.3 min read
2. What Is an LLC and an S Corporation?
3. What Are the Similarities Between an LLC and S Corporation?
4. What Are the Differences Between an LLC and an S Corporation?
LLC and S Corp
An LLC and S corp are two different ways to structure a business. Both have their advantages and disadvantages and depending on what your business goals are, and one may be better suited for you than the other. That is why it’s important to do your background research before you commit to either one.
What Is an LLC and an S Corporation?
A limited liability company is regulated under state law and has many of the beneficial attributes of a corporation, but is simpler to form. As the name states, forming an LLC provides the owner will limited liability. This means that the owner will not be held personally liable for any of the LLC’s debts or legal implications. An LLC also protects an owner’s personal assets from being reached by the business’s creditors.
If an LLC has multiple owners, the general rule is that it will be taxed like a partnership. If it is run by only one person, then it will be taxed like a sole proprietorship. While most LLC owners are fine with this rule, they can choose to instead request that they be taxed like a C or S corporation. If they so choose, all they need to do is file a form with the Internal Revenue Service (“IRS”), and from then on the IRS will treat the LLC like a corporation.
In order to be taxed like a corporation, the LLC must meet certain requirements, such as:
- There are no more than one hundred shareholders
- None of the shareholders are non-U.S. citizens
- None of the shareholders are partnerships or corporations
Typically, most small businesses do not have any trouble meeting these requirements.
An S corporation is simply a corporation that has chosen to be taxed a certain way. It gets its name from Chapter 1, Subsection S of the IRS code.
What Are the Similarities Between an LLC and S Corporation?
There are more similarities between an LLC and an S corporation than one might initially think. Both provide limited liability to the business’s owners. As stated above, except in very narrow circumstances, the owners will be shielded from personal liability for the LLC’s debts and liabilities. The exception to this rule is if the owners acted negligently or unethically.
Both an LLC and an S corporation are considered distinct entities from the owners. The limited liability stems from this concept. They are also both regulated under state law, meaning that they must follow the state’s requirements for annual filing, registration, and maintaining their business according to the laws of the state.
An LLC and an S corporation are both considered pass through entities, which means that they avoid double taxation. A pass through entity essentially means that the owners do not have to report the business’s income twice. They just do so once on their personal tax return (if an LLC) or their business tax return (if an S corporation). The business’s income or losses are “passed through” to the owners’ personal tax return.
An LLC and an S Corporation are both allowed to deduct business expenses, such as work travel, health care costs, marketing expenses, and phone bills.
What Are the Differences Between an LLC and an S Corporation?
One of the main differences between an LLC and an S corporation is ownership. The IRS places certain restrictions on the owners of an S corporation, whereas the owners of an LLC do not have any restrictions. For instance, LLCs can have an unlimited amount of owners. By contrast, the IRS does not allow an S corporation to have more than one hundred owners (shareholders). None of the shareholders of an S corporation are allowed to be non-U.S. citizens, whereas the owners of an LLC have no such restriction.
Another big difference between an LLC and an S corporation are the regulatory formalities. S corporations are subject to many different requirements, such as adopting Articles of Incorporation, issuing stock, having annual shareholder meetings, creating a board of directors, etc. The state requires an S corporation do all these things or else face penalties, including dissolution. However, the state does not require an LLC to do any of these things, it merely suggests that they do.
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