What are the Differences & Benefits of each?

Whether you are just starting a business or thinking of changing your business structure, a common first step is comparing the LLC vs. the S-Corp. While a limited liability company and an S-corps share some characteristics, they also have distinct differences.

Each new business owner needs to be familiar with each before deciding which entity is right for you.

What are the similarities of LLCs and S-Corps?

Limited Liability Protection. The owners of LLCs and S-Corps are not personally responsible for business debts and liabilities. Instead, the LLC or the S-Corp, are the owner of the business, is responsible for its debts and liabilities.

Separate entities. Both are separate legal entities created by a state filing. However, they are formed under and governed by very different state business entity statutes

Pass-through taxation. Both are pass-through tax entities. (Although an LLC can choose not to be taxed as pass-through if the owners so choose). With pass-through taxation, no income taxes are paid at the business level. Business profit or loss is passed through to the owners’ personal tax returns. Any necessary tax is reported and paid at the individual level.

Ongoing state compliance requirements. The LLC and S-Corp are both subject to certain obligations imposed by the state corporation and LLC

statutes, such as having to appoint and maintain: a registered agent, filing annual reports and paying annual fees, notifying the state of certain changes such as a change of name, registered agent or entity type and having to qualify to do business in states outside of the formation state.

What are the Differences in ownership and formalities of an LLC vs a S-Corp?

Ownership. The IRS rules restrict S-Corp ownership. Limited Liability Company’s do not. The S-Corp comes with IRS restrictions that include but are not limited to the following:

• LLCs can have an unlimited number of members; an S-Corp can have no more than 100 shareholders (owners).
• Non-U.S. citizens/residents can be members of LLCs; an S-Corp may not have non-U.S. citizens/residents as shareholders.
• S-Corps cannot be owned by corporations, LLCs, partnerships, or many trusts. This is not the case for LLCs.
• LLCs are allowed to have subsidiaries without restriction.
• S-Corps cannot issue classes of stock with different financial rights such as giving some shareholders a preference to distributions over other shareholders.
• LLCs can issue classes of stock with different financial rights such as giving some shareholders a preference to distributions over other shareholders.

Are their Ongoing Formalities regarding either Business Formation?

Corporation laws have more mandatory requirements regarding how S-Corps are to be managed than LLC laws. Therefore, S-Corps face more extensive internal formalities. While LLCs are not required.

What are the Required formalities for S-Corporations?

An S-Corp must adopt bylaws, issuing stock, holding initial and annual director and shareholder meetings, and keeping meeting minutes with corporate records.

What are the Recommended formalities for LLCs?

It is recommended that all LLCs adopt an operating agreement, issue membership shares, hold and document annual member meetings (and manager meetings, if the LLC is manager-managed), and documenting all major company decisions.

Are there Different Management Styles regarding Management of Either an LLC or an S-Corp?

Owners of an LLC can choose to have members (owners), or managers manage the LLC. When members manage an LLC, the LLC is much like a partnership (or a sole proprietorship if there is only one member). If run by managers, the LLC more closely resembles a corporation as members will not be involved in the daily business decisions.

S-Corps have directors and officers. The board of directors oversees-Corporate affairs and handles major decisions but not daily operations. Instead, directors elect officers who manage daily business affairs. Shareholders do not manage the business and affairs.

Are there Any Other Differences Between LLCs and S-Corps?

Other differences between S-Corps and LLCs include:

Transferability of ownership. S-Corp stock is freely transferable, as long as IRS ownership restrictions are met. An LLC membership interest (ownership) typically is not freely transferable approval from other members is often required. (Although the members may provide otherwise in their operating agreement if they wish.)

Self-employment taxes. S-Corps may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount. Corporate earnings after payment of the salary may be able to be treated as unearned income that is not subject to self-employment taxes.

Allocation of profits and losses. S-Corp shareholders receive their profits and losses based on their percentage of ownership (e.g., a 50% shareholder receives 50% of the profits and losses). LLCs can allocate profits and losses on almost any basis they want (e.g., a member with a 50% ownership interest could be entitled to 90% of the profits and losses).

It is important to understand the differences between business structures when forming a new business venture. We suggest that any new business should consult with an Attorney and a CPA to determine what structure is best for you.