Limited Liability Company vs. S Corporation
The format and structure of your business will shape and mold how the company operates. Every type of business structure has advantages and disadvantages. Two very common and similar types of business structure are limited liability companies and S corporations. While the two styles may be similar, they also have distinct differences that may make one a better option depending on the circumstances of the business. You should get familiar with each before deciding which is the best choice for your business.
How are they similar?
As previously stated, limited liability companies and S corporations have many similarities. These similarities include that they have limited liability, are separate entities, they are pass through taxation, and they have similar state requirements.
Limited liability protection is an incredible boon that protects the owners of the business. With limited liability protection, the owners of the firm are not or are partially not responsible for the business debts and possible liabilities.
Limited liability company or S corporation are both considered to be separate entities by a state filing.
Both businesses are pass-through tax entities. Pass through tax entities are exempt from income tax. Instead, the business owners are directly taxed based on revenues and losses, so any form of tax is reported and paid by the few that own the company. While S corporations must always file their tax returns, a limited liability company only has to submit taxes if it has multiple owners.
All business structures have some form or requirement that they must meet before they are considered a business by the state. The requisites for a limited liability company and an S corporation are similar.
How are they different?
Limited liability companies and S corporations only differ in ownership and a few formalities.
For example, the IRS has put restrictions on who can own an S corporation, but no restriction on who can own a limited liability company. The restrictions for an S corporation are:
An S corporation can only have as many as 100 shareholders or owners, while a limited liability company may have infinite.
All owners of an S corporation must be U.S. citizens and residents, but non-U.S. citizens can be owners or members of limited liability.
S corporations have restrictions on the type of businesses that can own them. C corporations, another S corporation, limited liability companies, partnerships, or too many trusts are not able to own an S corporation. A limited liability company does not have those restrictions.
Limited liability companies are not restricted in their ownership of subsidiaries.
LLC vs. S-Corp
The other way they two structures significantly differ is by the distinctions in their formalities.
The internal formalities for both structures are different. An S corporation has several strict internal formalities, while internal formalities are more like suggestions for a limited liability company. The required formalities for an S corporation are:
- Adopting bylaws
- Holding initial and annual director and shareholder meetings
- Issuing out stock
- Keeping the meeting minutes on the corporate record.
The recommended formalities for an LLC include:
- Having an operating agreement
- Documenting important company decisions
- Holding and recording member meetings annually
- Issuing membership shares.
Other minor distinctions between S-Corps and LLCs
While those are the two most substantial differences between the two structures, there are other more minor distinctions.
The method in which the managers manage the two different structures is different. A limited liability company may function more like a partnership is it has several members in it. However, if the corporation only has several managers, it will operate more like a business. Members will not play a role in day to day business decisions. An S corporation must have directors and officers. The directors oversee all corporate affairs and handle major business decisions but are not responsible for daily operations. The officers are the men and women who ensure the corporation continues to run from day to day.
The two corporations vary by the length of their suspected existence. An S corporation exists indefinitely, but an LLC may have a specified date that it must be dissolved.
An S corp is much easier to transfer stock in as long as the IRS restrictions are met. Moving stock in a limited liability company often involves the approval of other members.
The owner of an S corporation has better self-employment tax benefits than an owner of a limited liability company because the proprietor of an S corporation may be treated as an employee of the company and not an owner.