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.
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.