LLC vs S-Corporation

Limited liability companies (LLCs) and S corporations possess both differences and similarities. LLCs have fewer restrictions than S corporations in terms of the number of owners or partnerships and in terms of administrative tasks. LLCs do not require the annual shareholder meetings, maintaining bylaws, stock issuances or any of the other administrative duties that are required of an S-Corporation. Both company structures have their benefits and should be considered.

What are the Primary Differences Between LLCs and S Corporations?
Structure: S corporations are comprised of five or fewer people that own at least half the stock in the company. The LLC, however, may have an unlimited number of owners or members. Stock is not required in an LLC, and thus, there is less administrative duties.

Taxation: S corporations are taxed similarly to partnerships, but they enjoy the legal rights of being a corporation. S corporations do not pay federal income taxes as an entity. Each shareholder shares the burden or benefit of the income or losses on their personal income tax returns. Instead of both the shareholder’s dividends and the corporation profits being taxed. Only the shareholder’s dividends will be taxed in an S corporation.

On the other hand, LLCs have the flexibility of selecting how they would prefer to be taxed. They may select to be taxed like an S corporation or C corporation, yet maintain their LLC status. If they are taxed as an LLC, the procedure would depend upon the number of members in the LLC.

For instance, LLCs with a single member would require the member to report all profits and losses on his or her individual tax return. If there are multiple members, the LLC is treated as a partnership for tax purposes and the entity must file the IRS Form 1065.

Number of Owners or Partners: LLCs can have an unlimited number of owners and members. On the other hand, S Corporations must have five or fewer shareholders that own 50% of the stock in charge of the corporation. S Corporations also cannot have more than 100 shareholders.

Requirements: To become a S corporation, the entity must be a domestic corporation or a LLC. The corporation must only have one class of stock and must not have more than 100 shareholders. Spouses are automatically given shareholder status.

The shareholders must be United States residents and citizens. Some 501©3 corporations are permitted to be shareholders. The profits and losses of the company are allocated to the shareholders according to the percentage of the shares the shareholder owns.

The LLC, by contrast, requires its members to contact the Secretary of State and file an Articles of Organization. The entity will be considered a statutory creation after the fees are paid. Other requirements will depend upon the state where the business was established. LLCs may have to file an annual statement. In most instances, the statements will be filed from $10 to $300.

A franchise tax may be charge also. This fee gives the LLC the “privilege” of operating in that particular state. The tax may be based on revenue or other criteria that varies from state to state. These taxes may be due on the anniversary of the LLCs formation or on a date that all LLCs are due. Franchise taxes may also be applicable to S corporations.

Conclusion

LLCs are simpler to start, maintain and dissolve than S corporations in general. The taxes are generally less than S corporations also. S corporations have the benefit of shareholders to raise money for the company. But, S corporations are easily assumed by other investors, whereas LLCs are not frequently bought out by an external entity. The decision between starting a LLC or S corporation will depend upon your business’s personal needs.