LLC vs. Sub S: Everything You Need to Know
If comparing the LLC vs. Sub S Corporation, then you will need to first identify which solution is better for your business.3 min read
If comparing the LLC vs. Sub S Corporation, then you will need to first identify which solution is better for your business. While both business structures share similar qualities, they have some key differences in the way in which they operate. Specifically, LLCs are easier to form, easier to manage, and take less time to ensure compliance with state and federal regulations. However, S corps allow you to share stock to investors. While both business structures are good options, and they both offer some level of personal liability protection, you’ll want to take a look at all of the benefits and potential disadvantages to operating an LLC or S corporation.
Similarities Between an LLC and S Corporation
There are many similarities between an LLC and an S corporation, including limited liability protection for its owners. This means that the owners are usually not personally liable for the debts of the business. Similarly, both business structures operate as pass-through tax entities, meaning that the profits of the business are passed through to the owners. If taxes are due on those profits, the owners of the business must pay the taxes. Furthermore, both businesses can deduct pre-tax expenses, i.e., travel, phone, car, gifts, advertising, computers, etc.
Differences Between an LLC and S Corporation
There are many differences between an LLC and S corporation, and you should be well educated in these differences, so that you know which type of business structure is the right choice for your goals and business objectives. Some of these differences can be found in the following areas:
- Length of existence
- Self-employment tax
There are restrictions when it comes to S corporations; as such, S corporations cannot have more than 100 owners (shareholders). LLCs, however, can have an unlimited number of members.
The IRS provides that non-U.S. citizens can be members of LLCs, but such persons cannot be owners of S corporations.
There are several formalities regarding the ongoing maintenance of an S corporation, including the adoption of bylaws, issuing of stock, conducting annual shareholder meetings, along with keeping meeting minutes.
With regard to the LLC, the only formalities include the adoption of an operating agreement (not required in most states), issuance of membership shares (referred to as distributive shares), having periodic or annual meetings, and documenting all significant decisions. Keep in mind that the LLC formalities are not requirements, and are only formalities that are recommended by most states.
LLC owners can choose to operate a member-managed or manager-managed LLC. If the members manage the LLC, it essentially operates very similarly to a partnership. If a manager operates the LLC, then the LLC resembles a corporation, as the members are only involved in the significant business decisions and not the daily operations of the business.
S corps, however, have directors and officers. The board of directors oversees the daily operations of the corporation, while also handling all major decisions. With regard to the S corps daily operations, the board of directors hires officers who oversee such daily operations.
Length of Existence
An S corporation’s existence can last forever, whereas some states provide that an LLC must identify a dissolution date. For example, certain events might trigger the dissolution of an LLC, i.e., death or withdrawal of a member.
S corporation stock can be freely transferred, whereas the ownership in an LLC is usually not freely transferable, and must be approved by a majority (or all) members in the LLC. This is generally laid out in the LLC Operating Agreement.
S corporation owners might not need to pay self-employment taxes, particularly if the S corp owner is treated as an employee and paid a “reasonable” salary by the corporation. Generally, LLC members are required to pay self-employment taxes on their share of profits; this is paid on their personal tax returns.
If you need help determining whether you should form an LLC or S corp, you can post your legal need 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.