LLC vs LLP vs S Corp: Everything You Need to Know
Comparing LLC vs. LLP vs. S corp business structures is important for every entrepreneur. A business can be as small as a single person or it can be a multinational conglomerate. 4 min read
Comparing LLC vs. LLP vs. S corp business structures is important for every entrepreneur. A business can be as small as a single person or it can be a multinational conglomerate. However, each starts out with basic paperwork. The main concepts to consider in forming an LLC, an LLP, or a corporation deal with liability and tax requirements.
LLC Versus LLP Versus S Corp
The major differences among limited liability partnerships (LLPs), limited liability companies (LLCs), and S corporations deal with how much money is owed to the IRS. Profits are taxed differently with each structure and who is responsible for those taxes varies.
Limited Liability Companies
An LLC is a flexible business option. However, regulations differ by state, and not every business qualifies as an LLC. Limited liability companies enjoy “pass-through” taxes. This means all business profits and losses are reported on the owners' personal tax returns.
LLC owners, who are referred to as members, are protected from personal liability for business claims or debts. They only stand to lose what they personally invested in the business if things go awry. Essentially, LLCs offer similar liability protections to corporate shareholders, but with simpler management and taxation options.
Limited Liability Partnerships
LLPs have more than one owner, each of whom has a limited amount of personal liability for business-related debts. Licensed professionals, such as doctors and lawyers, mainly use LLPs as part of their group practice. An LLP partner enjoys liability protections against another partner's debts or lawsuits, ensuring personal assets are never used to pay for another's mistakes.
Like LLCs, LLPs are easier to organize than corporations, making them a good option for professionals who want to enjoy liability protection.
The IRS grants S corp status to certain C corporations. Therefore, an S corporation is technically not a legal business structure. The change in corporate status affects the company's profit taxation.
S corp status is intended for small- to medium-sized domestic companies. As such, an S corp cannot have more than 100 shareholders. These shareholders are not liable for business-related debts. However, they do pay personal income taxes on their salaries or dividends because S corps are “pass-through entities.” This means all profits and losses pass through to the owners.
Unlike LLCs, S corps are corporations, so they must adhere to strict administrative duties to comply. These duties include:
- Passing bylaws
- Issuing stock
- Holding director and shareholder meetings
- Keeping accurate minutes of those meetings.
Larger corporations generally favor C corp status over S corp because it provides more flexibility. For example, C corps have unlimited shareholders and various voting privilege levels, allowing them to expand shares and grow the business. Shareholders must pay personal income taxes on dividends. However, they must also pay corporate taxes, which differs from S corp requirements. As such, C corps can be double-taxed.
Distinguishing Between LLCs and S Corporations
To reiterate, both LLC and S corporation owners are not personally responsible for business liabilities and debts. Both are separate entities creating by filing state documents, and both are pass-through tax entities. An LLC only files a business tax return if it has more than one member.
Both S corps and LLCs are subject to state-regulated formalities, such as paying required fees and filing annual reports.
The IRS does restrict ownership for S corps, but not LLCs. In fact:
- LLCs can have an unlimited number of members (owners). S corps are limited to 100 shareholders (owners).
- LLC members may be non-U.S. citizens. S corps cannot have non-U.S. citizen members.
- LLCs do not have any subsidiary restrictions. In contrast, S corps cannot be owned by other S corps, C corps, LLCs, trusts, or partnerships
Basically, S corporations are subject to more rigid formalities. These formalities are recommended to LLC owners, but members can choose not to follow them.
S corporations are required to abide by the following formalities:
- Holding regular director and shareholder meetings
- Issuing stock
- Adopting bylaws
- Keeping all minutes filed with corporate records.
Recommended LLC formalities include:
- Issuing membership shares
- Creating an operating agreement
- Holding annual member meetings
- Holding regular manager meetings
- Documenting company decisions.
Which Business Entity Is Best?
When you've determined a C corporation is not right for you, your options include:
- S corporation
- Single-member LLC
- Single-member LLC taxed as an S corp
- LLC taxed as an S corp
- LLC taxed as an LLP.
Which option is best depends on:
- Your company's potential net worth
- Whether you want shareholders
- Liability concerns
- Other factors.
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