LLC vs S Corp: What Are They? Differences & Benefits

One common hardship faced by most of the small businesses that are starting anew is related to incorporation. Sometimes new business owners struggle to find out the type of business structure they should choose. The struggle becomes even harder when they are making LLC vs S Corp comparisons.

Both of these structures are commonly followed business structures. Both LLC and S Corp structures are the most common business structures followed in the U.S. However, new business owners are often indecisive or choose a business structure that does not fit their business type because of a lack of knowledge.

Keep reading this article to find out the difference between LLC and S Corp. This should help you choose the business structure right for your small business.

What Is An LLC?

When starting out a business, an owner can reduce their liabilities by incorporating their business into an LLC. This is a business structure that combines the benefits of a Corporate structure and the tax benefits of a partnership business.

This makes the business establish itself as a legal entity of its own, and the owners of the business remain separate from the business and are called the members of the business. As a result, they are not personally responsible for the debts and the different obligations of the business. LLC provides business owners with greater benefits of structurization.

LLC is both a corporation type and also a pass-through business entity that allows profits and losses to pass through the personal tax returns of the members.

What Is An S Corp Business?  

Traditional business structures have the problems of double taxation from time to time. That is why S corp business structures are the best structures for medium-sized and smaller businesses.

The S Corp business structure allows businesses to pass their income and deductions through the personal tax returns of the shareholders. Also, the company does not have to pay any federal income tax. So, as a result, the company’s shareholders are getting taxed only once, instead of twice as a shareholder and a company.

However, small businesses need to meet certain business criteria to be eligible to get incorporated as an S Corp business.

In simple words, this business structure allows a business owner to have the liability protections of a corporation-type business while also having the tax benefits of a sole proprietorship or sole proprietorship.

LLC Vs S Corp: Key Differences 

There are some key differences between LLC and S Corp businesses. Keep reading the section below to know more about these differences –

Difference In Ownership

• LLC and S Corp businesses have different levels of ownership compatibility. S Corp businesses can have as many as 100 shareholders, while LLC business owners can have an unlimited number of shareholders.
• If you are doing business in the U.S. and have an S Corp business structure, then you can only have partners or shareholders from the U.S. However, the LLC structure allows businesses to have shareholders from across the world.
• LLCs, Partnerships, and any other business structures cannot own an S Corp business. But it is completely different for the LLC businesses.
• LLC businesses can have subsidiary businesses without any restrictions.

Difference In Management

• LLC structure allows businesses to have managers or members who manage the LLC. When members manage an LLC, then the company is seen as a partnership business with the structure of a corporation. On the other hand, if there is only one manager, then the structure is similar to a sole proprietorship with the benefits of a corporation. Also, if the business is run by multiple managers, then it has a similar structure as a corporation-type business.
• There are directors and officers in S Corp businesses. The board of directors in a business oversees different corporate affairs, and they are also responsible for major business operations. Instead, the board of directors of the business can elect managers to run day-to-day work affairs. Shareholders can not manage the business and affairs. Shareholders are not responsible for managing business operations and affairs.

Difference In Ongoing Formalities

There are many mandatory requirements for corporation businesses, such as following corporation laws. It differs from an LLC in terms of how the corporation is managed. There are more extensive internal formalities in S Corp businesses than there are LLCs. Here are some formality-related differences between an LLC and an S Corp business.

• S Corporations face more formalities than LLC businesses. For example, Adopting bylaws, issuing stocks, and having initial and annual director & shareholder meetings. Also, taking meeting minutes with corporate records.
• On the other hand, here are the recommended formalities for LLC businesses – adopting an agreement for operations, issuing shares for membership, hosting annual member meetings, and documenting minutes of the meeting.

Other Differences

Aside from the differences mentioned above, there are other differences that you need to know about.

• If the IRS ownership restrictions are met, the stocks of the S Corporation business are freely transferable. Usually, LLC membership interests can not be easily transferable. Sometimes, the transfer may need approval from other members.
• There might be preferable self-employment taxes in an S Corp business structure compared to an LLC business. The reason is because the owner can be treated like an employee.
• The S Corporation Business Shareholders receive their profits and their losses depending on the percentage of the company they own. On the other hand, LLC businesses can allocate their profits and their losses on almost any basis they want.

Final Words

It is needless to say the structure of a business is detrimental to its managerial operations, its profitability, and taxation. If you are starting your business and looking for the best way to incorporate your business, then you must have a clear idea about LLC vs. S Corp. Both of the business structures have their own benefits.

If you are doubting how to choose the best structure, then it would be wise to check how your business operates. You can consider the liability protection you want and understand the compliance you require for both of the structures.

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