S Corp vs LLC Chart: Everything You Need to Know
An S corp vs LLC chart shows the many similarities and differences between the two entities. Differences include restrictions on who can be the shareholders, or owners, of the company, qualifications, taxation, and management requirements.3 min read
An S corp vs LLC chart shows the many similarities and differences between the two entities. Differences include restrictions on who can be the shareholders, or owners, of the company, qualifications, taxation, and management requirements. They share characteristics in common too, however, such as pass-through taxation.
LLCs and S corporations work differently with regard to ownership. S corporations have restrictions on who can be the owners, or shareholders, of the company. S corporations also have to pay salaries to any owners who work for the company if they own more than 2 percent. LLCs do not need to pay salaries to their owners, also called members. They are only allowed to have one class of stock, but if you want to establish a stock option plan for employees, it is easier to do with an S corporation than with an LLC.
Differences: Qualification for S-Corp Status
There are many requirements for a business to be set up as an S corporation:
- The business must be a domestic corporation or an existing LLC
- The business must have only one class of stock and fewer than 100 shareholders. Individual family members such as spouses, siblings, cousins, parents, etc., may be treated as a single shareholder for this purpose.
- All shareholders need to be residents or citizens of the U.S.
- Other corporations and partnerships are not allowed to be S-corp shareholders, with the exception of certain tax-exempt corporations.
- Profits and losses must be divided among shareholders according to their percentage of ownership.
Differences: Stock Ownership
Technically, an LLC does not issue shares of stock, which makes establishing stock option plans for employees complicated. It is also a complicated process to set up different classes of stock or ownership conditions with LLCs, and doing so requires special provisions in the operating agreement. For this reason, investors prefer S corporations over LLCs. Since S corporations can only have one class of stock, however, and investors often want preferred stocks, many companies choose to convert to C corporation status when investments take place.
Differences: Management Structure
Like C corporations, S corporations must have a board of directors, which is elected by their shareholders. The board, in turn, appoints officers, who manage the business' day-to-day operations. By contrast, an LLC can be managed by its members or a team of appointed managers. Like a partnership, LLCs can set up the management structure with their operating agreement. They may have a board of managers if they desire.
Similarities: Taxation and Liability Protection
One of the main similarities between S corporations and LLCs is limited liability protection; both entities protect owners from the debts and liabilities of their businesses. Both LLCs and S-corps are separate entities from their owners that are created by filing with the state. Both must file annual reports and pay fees for continued authorization to do business in their states. However, while S corporations have to file business tax returns, LLCs do not need to file a tax return unless there is more than one owner.
C corporations are subject to double taxation because owners are taxed on their distributions or dividends, and the corporation is also taxed on its profits. S corporations do not have this issue since all its income is passed directly to its owners. Neither S corporations nor LLCs pay income tax on their behalf because both have what is referred to as “pass-through taxation.” That means any profit or loss is passed through to the owners' personal tax returns, and owners must pay tax on this income themselves.
Shareholders of an S corporation must use Form 1120S to report their salaries if they have any, and use Schedule K-1 to report the distribution of profits. LLC owners report their income distributions on their own personal 1040 form, Schedule C, or Form 1065 along with Schedule K-1. If an LLC chooses to be taxed as an S corporation, owners follow S corporation tax reporting guidelines.
Aside from income tax, other taxes such as local tax, state tax or employees' FICA and Medicare tax remain the same no matter what entity is chosen for a business.
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