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LLC vs. "S" Corporation

Credit: ACorporation4Less.com

Similarities

1. Both are separate legal entities that are created by a state filing.

2. They offer the same limited liability protection, the owners are typically not personally responsible for the debts and liabilities of the business.

3. Both are pass-through tax entities – this means that the income or loss generated by the business is reflected on the personal income tax return of the owners.

Differences

1. The ownership of an S Corporation is restricted; however, a limited liability company does not possess these same limitations. The following are some of the restrictions imposed by the IRS:

a. An LLC can have an unlimited number of members (owners) while a subchapter S Corporation is restricted to no more than 100 shareholders.

b. Non-US residents can be members of an LLC while an S Corporation may not have non-US residents as shareholders.

c. Also, S Corporations cannot be owned by C corporations, other S Corporations, many trusts, LLCs, or partnerships. Limited Liability Companies are not subject to these restrictions.

 

2. LLCs are allowed to have subsidiaries without restriction.

3. Formalities:

a. A corporation requires formalities, annual meetings of shareholders and directors are required each year and meeting minutes are required to be kept with the corporation’s records.

b. LLCs are not required to hold such meeting; however, it is a good idea to document major decisions of the company.

4. A corporation’s existence is perpetual. Conversely, an LLC typically has a limited life span. Most states require that an LLC list a dissolution date in its articles of organization and certain events such as the death or withdrawal of a member can cause the LLC to dissolve.

5. The stock of an S Corporation is freely transferable while the interest (ownership) of LLC is not – typically the approval of the other members must be received.

6. An S Corporation may have advantages with self-employment taxes in comparison with an LLC. For more information on this issue, please contact your tax advisor.

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