LLC vs. S Corporation

LLC (Limited Liability Company) and an S corporation are both corporate structures that, in the United States, allow pass-through taxation. The main differences between an S corp. and LLC are:

These differences are explained in more detail below.

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LLC

User Rating (356):

S Corporation

User Rating (104):
Suitable for Smaller businesses with few shareholders Small businesses with less than 100 shareholders, consisting of US citizens and/or resident aliens for income tax purposes.
Taxation Single taxation - Profit or loss are passed directly to members(top bracket 39.6%). Can elect to be taxed as a corporation. Single taxation (Profit or loss are passed directly to shareholders)
Management Level Only Members and managing members of the company Officers, board of directors of the company
Ownership Members Shareholders are owners of an S-Corp.
Legal entity Separate entity from partners, but members may be held liable for non-fiscal obligations Separate entity from shareholders (owners), who cannot be normally held liable for any fiscal obligations
Choice of taxation structure given Yes, it is a Single Member LLC - SMLLC or partnership by default, and S or C Corporation (by election) No. An S corporation chooses to be taxed under Subchapter S of the IRC.
Paperwork and records Not much paperwork is required. Annual state reports are required to be filed with the appropriate fee; can file by mail but most states allow or mandate online filing Formal board and shareholder meetings and minutes are required. Annual state reports are also required to be filed with the appropriate fee; can file by mail but most states allow or mandate online filing
Shareholders meeting Not necessary, but should have recorded activities and/or advisory boards Formal shareholders and board meetings are required
Limited Liability Yes Yes
Continuity of life Indefinite term Indefinite term
Members needed to set up 1 or more 1 or more
Regulation of entity name Differs with each state but mostly LLC or L.L.C. is added. Can be Inc., Incorporated, Corporation or Corp.
Legal agreements May not be required in some states. Should have an operating agreement with business records Should have bylaws with business records
Self employment tax Assessed on business profits of $400 or more None
Non-permitted shareholders None Corporations, Partnerships, multi-member LLCs, LLPs Charitable Remainder Trusts
Permitted Owners or Shareholders US citizens and/or resident aliens, non-resident aliens, corporations, partnerships, etc. US citizens and/or resident aliens, estates of deceased individuals, bankruptcy estates, SMLLC, qualifed pension and profit sharing plans 501(c)(3) charities, ESBTs, QSSTs, and ESOPs
Stock rules N/A Only one class of stock permitted in an S-Corp.
Tax Year Calendar year; can use any fiscal year if requirements are met. Calender year; can use any fiscal year if requirements are met.
Penalties $89 per member per month or part thereof for a maximum of 12 months $89 - $195 per shareholder per month or part thereof for a maximum of 12 months
Salary for owners or shareholders No; Single Member LLCs and LLC-partnerships members are not employees thus salaries must not be paid themselves; they are allowed withdrawals Yes, must be paid to shareholders owning more than 2% and provides services to their business; not optional mandatory
Due dates 15th day of the fourth month of the following year; extensions extend for addtional 6 months(SMLLC) and 5 months (partnerships) 15th day of the third month of the following year; extensions extend for addtional 6 months
Distributions Withdrawals throughout the business operating year; allowed provided the distributions don't prevent the company to pay its current operating obligations. allowed throughout the business operating year, allowed after salaries are paid to the 2% or more owner-shareholders.

Contents: LLC vs S Corporation

edit Formation of LLC vs. S-corp

Typically, forming an LLC only requires a state filing (usually to the Secretary of State's office). The state filing typically consists of information such as:

Depending upon the city where the LLC is operating, a filing with the city may also be required. A Federal Tax ID (also called Employer Identification Number) is also required for an LLC that has employees.

An S corporation is a corporation that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code of the IRS. The formation typically requires a state filing, obtaining a Federal Tax ID and an S election. The state filing typically consists of:

If a corporation meets the requirements of S corporation status and wishes to be taxed under Subchapter S, its shareholders may file Form 2553: "Election by a Small Business Corporation" with the Internal Revenue Service (IRS). The Form 2553 must be signed by all of the corporation's shareholders. If a shareholder resides in a community property state, the shareholder's spouse generally must also sign the 2553.

The S corporation election must typically be made by the fifteenth day of the third month of the tax year for which the election is intended to be effective, or at any time during the year immediately preceding the tax year. Some states such as New York and New Jersey require a separate state-level S election in order for the corporation to be treated, for state tax purposes, as an S corporation.

edit Limitations

edit Qualification for S corporation status

In order to make an election to be treated as an S corporation, the following requirements must be met:

If a corporation that has elected to be treated as an S corporation ceases to meet the requirements (for example, if as a result of stock transfers, the number of shareholders exceeds 100 or an ineligible shareholder such as a nonresident alien acquires a share), the corporation will lose its S corporation status and revert to being a regular C corporation.

edit Limitations of LLCs

While LLCs can have different "classes" of stock, this is usually accomplished by complicated operating agreements. Corporate law (as applicable to C and S corporations) is more established and therefore, investors and venture capitalists prefer to invest in corporations vs. LLCs. Defining and setting up employee stock option plans is also complicated with LLCs. However, it should be noted that since S corporations can only have 1 class of stock, companies usually choose to lose their S corp status when they accept investments (because investors typically demand preferred stocks). See Common Stock vs Preferred Stock.

edit Management and Operation

S corporations, like C corporations, are managed by a board of directors, elected by shareholders. Day-to-day operations are managed by officers who are appointed by directors.

LLCs can be member-managed or can have a team of managers. This flexibility is similar to a partnership and allows LLCs to outline management duties in their operating agreement, with an optional board of managers.

edit Taxation of an LLC vs. S corp

While employee Medicare and FICA taxes, as well as state taxes are not affected by a company's corporate structure, federal income tax treatments are different for LLCs and S corporations. The corporate tax rate is usually lower than the personal income tax rate. However, in the case of C corporations, there is double taxation because (a.) The corporation is taxed on profits, and (b) when these profits are distributed to shareholders (owners), the owners are taxed on these dividends.

S corporations can bypass this double taxation by reporting the entire income on the personal income tax returns of the shareholders. This is done in proportion to the ownership of each shareholder in the company. Not only does this allow bypassing double taxation, it also means that the losses incurred by the company can be reported on the shareholders' personal income tax return, thereby reducing their tax liability. C corporations carry their losses forward to offset them against future profits of the company.

An LLC can choose to be taxed either as an S corporation or a C corporation.

edit Tax Reporting

For S corporations, shareholders report income on Form 1120S, Salaries on Form W-2 and Profit distribution on Schedule K-1. For LLCs, members report income on their personal income tax Form 1040 Schedule C OR Form 1065 & Schedule K-1 for profit distributions. LLCs may also opt to be taxed as C or S corporation. If an LLC opts to be taxed as a C corporation, tax reporting is on Form 1120 for income, Salaries on Form W-2 and Profit distribution on Form 1099-DIV.

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