What Is the Difference Between an S Corp and a LLC?

There are several organizational options available to anyone starting a business. Two such options are the S Corporation or the Limited Liability Company (LLC). Before selection one most appropriate ofor your situation, it’s important to know the differences. The questions pitting an LLC VS S Corporation are common ones that are easy to answer.

Tax advantages are the primary benefit to an S Corp. Members are taxed as shareholders or employees. The S Corp itself only pays taxes on particular passive income. The S Corp is considered to be its own legal entity and continue in operation should one member pass away. The S Corp also provides some liability protection to its members. The S Corp also has specific requirements that must be met such as a limit to one hundred members, be elected using IRS Form 2553 and be a domestic corporation.

An LLC is designed to maintain some benefits of a sole proprietorship or partnership while at the same time shielding its members from liability. LLCs are not subject to the one hundred member maximum. The LLC also does not exist for tax purposes. The members or business owners must file a tax return as a corporation, partnership or sole proprietor. Unlike an S Corp where profits are divided according to the percentage of shares owned, LLC members can split profits according to any percentage they choose. The business owners must also pay self employment taxes which will generally result in a higher tax bill than with an S Corp. This higher tax bill is offset by the increased liability protection. LLC members can only be sued for the amount that they have invested in the organization. The LLC is easier to manage and organize because the members don’t have to incorporate before electing the LLC designation. LLCs are governed by state law. The requirements for an LLC will vary slightly from state to state.

There are several factors that must be taken into consideration when trying to decide which form of business is best for your organization. These factors include income, size of the business, the state in which you will organize and conduct business and of course the liability protection that is required.

If you need information or help in forming a Limited Liability Company, contact www.LLC.NET for assistance.