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 entity, the small business owner should think carefully about which type of incorporation is most suited to their needs.
LLCs and S-corporations have many similarities, along with some differences. A comparison between the two enables the owner to work out which one is most closely suited to their business type.
What are the similarities?
- Both are covered with limited liability protection. The owners do not personally bear the debts that are incurred during business transactions. That means the owners' assets (such as a 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 significant 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.
What are the differences?
- The major difference is that the IRS stipulates that the S-corporation must be limited to the number of owners it may have. It can't exceed 100 individuals. An LLC can have an unlimited number of owners.
- 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 and additional kinds of business structures.
- There can be as many subdivisions to an LLC as it needs.
- S-Corporations face several 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 accurate 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 significant decisions.
- An S-Corporation enjoys a long life as opposed to an 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 member results in the dissolution of an LLC.
- The S-Corporation stock is freely transferable and is not the case with an LLC, which may need all the members' approval before any ownership transfer.
- Self-employment taxes can be less with the S-Corporations than with the LLCs.