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Limited Liability Companies (LLCs) vs. S Corporations
There are many different kinds of business
structures for you to choose from, when you’re deciding
how to incorporate your company. Within the different types
of entities, the LLC and the S-Corporation are the major ones.
Before planning for a new incorporation, the small business
owner should think carefully about which type of incorporation
is most suited to his or her needs.
LLCs and S-corporations have many similarities along with
some striking differences. A comparison between the two enables
the owner to work out which one is most closely suited to
his or her business type.
What are the similarities?
- Both are covered by limited
liability protection. The debts that are incurred
during business transactions, are not personally borne
by the owners. That means the assets of the owners
(such as car, or house) can’t be seized to pay
off any outstanding debts belonging to the business.
- S-Corporations and LLCs
retain the status of separate legal entities.
- The major similarity is
that both are “pass-through” taxation
entities. Though you still need to file business returns,
the profit or loss incurred is passed through to the
individual tax returns, so the tax is paid individually.
- The state requirements regarding
external formalities need to be fulfilled by both
these structures. They both have to file annual reports
and pay the necessary fees.
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What are the differences?
- The major difference is that
IRS stipulates that the S-corporation must be limited
on the number of owners it may have. In fact, it can’t
exceed 100 people. This is not the case for an LLC,
and it can therefore have as many as it needs.
- There are restrictions on
S-Corporations concerning having non-US residents
as its shareholders. But for LLCs, there is no such
limitation.
- Other S-Corporations, C-Corporations
or LLCs cannot own the existing S-corporation. However,
the LLC can be owned by the other trusts, along with
additional kinds of business structures.
- There can be as many subdivisions
to an LLC as it needs.
- S-Corporations face a number
of formalities regarding the bylaws, annual meetings,
submission of taxes and reports annually, etc. Record
keeping can therefore be a strenuous task with S-Corporations.
(LLCs are also recommended to adopt neat record keeping
and the issuing of shares. Owners should at least
document all the major decisions of the company).
- Its members manage an LLC,
much like a partnership. However, with S-Corporations,
directors and officers manage the affairs. The officers
elected by directors take care of the day-to-day work
and the directors are responsible for the major decisions.
- An S-Corporation enjoys
a long life as opposed to the LLC. The LLC has to
give in writing how long it will last, at the time
that it’s submitting the document of formation.
Even death or withdrawal of a member results in dissolution
of an LLC.
- As long as the company meets
IRS requirements, the S-Corporation stock is freely
transferable. This is not the case with an LLC company,
which needs approval of all the members before any
transfer of stock.
- Self-employment taxes are
less with the S-Corporations than with the LLCs.
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