Differences Between an LLC and an S Corp

Differences Between an LLC and an S Corp

If you are a small business wondering whether to register as an LLC or an S Corp, this post can help you decide. Continue to read and learn how both entities are different and may suit your needs. 

Limited Liability Company (LLC)

An LLC is a legal designation to help protect business owners from personal liability against a business’s financial and legal obligations. You can create a single and multi-member LLC. 

LLC offers your business a formal structure with taxation similar to sole-proprietorship or partnership business. LLC has more flexibility in its organization as well as profit distribution. As an LLC, you can choose to be a corporation, and if you are a business owner of an LLC, you can save money by electing for S Corp taxation status.

S Corporation

S Corporation or S Corp refers to tax classification to protect the assets of small business owners from double taxation. This type of business use pass-through taxation that allows business owners to claim a share of the company’s profit on their personal tax return. This way, their profits are not double-taxed. 

You must first form a C Corp that fulfills S Corp requirements to become one. This pre-requisite includes electing your business’ S Corp status 45 days after the official organization of your business. Additionally, you must cap the S Corp ownership to 100 individuals and limit owner shares to American citizens only. 

Differences Between an LLC and an S Corp

Here are the common difference between LLC and S Corp

Owner Employment

An LLC owner can either participate or stay inactive in the company’s management. On the other hand, an S Corp owner can be inactive or withdraw a salary from one of the company’s employees. 

Ownership Structure

LLCs can have unlimited owners without any restrictions on nationality or classification. In Contrast, an S Corp can only have a maximum of 100 or fewer owners, and they must all be U.S citizens and U.S-based trust. 

Management Structure

LLC has a manager to run its daily operations and can even appoint as many officers as it needs to. However, S Corp shareholders must elect a board of directors while officers run its day-to-day operations. 

Stocks and Shareholders

A limited liability company cannot issue stocks and has no shareholders. An LLC must also pay its members as per the Articles of Organization. On the other hand, S Corp has the permission to issue common stock, giving shareholders voting rights. 

Reporting Requirement and Tax Liability 

The business owner of an LLC must pay tax as a self-employed individual on all net profits. In contrast, an S Corp business owner can take a monthly salary while avoiding any self-employment tax on profits he gets from company stocks. 

The Cost

The cost to form an LLC may vary by state. However, it may range between $50 and $500. On the other hand, the incorporation fee for an S Corp falls between $100 and $250. These are just one-time fees that you have to pay. 

Which One Is Best For You? 

The answer to this depends on various factors such as

  • Number of owners with stakes in your business
  • Are all stakeholders U.S citizens? 
  • Does any corporation or partnership have a stake in your company?
  • Will the self-employment tax affect your net profit?

The answer to any or all of these questions can help you determine whether to choose LLC or S Corp status for your business. 

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