LLCs vs. S- Corporations – Their striking differences and similarities
Irrespective of whether you’re simply starting off with a new business or you’re thinking of altering the structure of the business, the first and foremost step to consider is to compare and contrast LLC against S-Corp so that you know which one suits you the best. While it is true that an LLC and an S-Corp share many similar qualities, they also have striking differences as well. It is vital for the potential business owners to get acquainted with the similarities and differences before deciding which one might be the appropriate option for them. Read on to know more.
Similarities between LLC and S-Corp
When you are all set to form an LLC or an S-Corp, check out the things that they both have common:
- Limited liability protection: In case of both the business structures, the owners of the business aren’t personally liable for the business liabilities and debts.
- Different entities: Both of them are different legal entities that are created by filing with the state
- Pass-through taxation policy: Both of them are pass-through tax identities. If you form an S-Corp, you ought to file a tax return while in case of an LLC, you will only have to file tax return in case the LLC has got more than one owner. In case of pass-through taxation, you don’t have to pay income taxes at the commercial level.
- State requirements: Both the business entities are subject to formalities that are made mandatory by the state like paying the required fees and filing yearly reports.
Differences in formalities and ownership
The S-Corps usually are subject to more stringent internal formalities while LLCs aren’t bound to follow them.
- Few formalities for S-Corps comprise of issuance of stock, adopting bylaws, conducting annual shareholder and director meetings and maintaining minute records of the company
- Recommended LLC formalities comprise of issuance of membership shares, adopting an agreement of operation, conducting annual meetings with members and documenting all the vital decisions taken in the company.
As per the IRS, the ownership of S-Corp is restricted but such is not the case with limited liability companies. Following are the few IRS restrictions:
- LLCs may have limitless number of members but S-Corps can’t have more than 100 owners or shareholders
- LLCs can appoint non-US residents as members but S-Corps might not appoint non-IS residents as shareholders
- LLCs are allowed to keep subsidiaries without restriction
- S Corporations can’t be owned by C Corps, other LLCs, S-Corporations, partnerships or other trusts. This isn’t the case for LLC
Differences with regards to management
- The LLC owners may choose to have managers or members handle the LLC. When the members tackle an LLC, it is more like a partnership.
- S Corps have officers and directors and the board of directors oversees all types of corporate affairs and tackles important decisions.
Therefore, when you’re someone who has been confused about whether to form an LLC or an S-Corp, you should take into account the above listed similarities and differences.