If you are launching a new business or changing your structure, you are probably wondering if an LLC or an S-Corporation offers more benefits to you as a business owner. Let’s take a look at the similarities and differences LLCs and S-Corporations offer, to put things in better perspective.
LLC and S-Corp Similarities
LLCs and corporations have a number of similarities. Both offer debt and liability protection to business owners. The LLC or the S-Corp are considered legal entities which are separate from the business owner. Both an LLC and an S-Corp are considered pass-through tax entities. That is, no income taxes are paid at a business level, so any profits or losses are passed to the business owner’s tax returns. All taxes are paid at a personal level, though an LLC has the ability to opt out of pass-through status. LLCs and S-Corporations must follow the tax laws and registration requirements in the state in which they are formed to stay in good standing.
According to the IRS, S-Corporations are limited to no more than 100 shareholders or owners, while LLCs have no such restrictions. S-Corporations also cannot be owned by other corporations, partnerships, trusts, or LLCs. And LLC, by contrast, can be owned by other entities. S-Corps have restrictions on the type of stock they can issue, and no shareholders can be given preferential distributions over other members. LLCs do not have to follow that guideline.
An LLC must be run by owners and managers. Partnerships and sole proprietorships are examples where the LLC is run by the owners. If there are managers in place, the owners are not involved in the day-to-day processes. If the business is an S-Corp, there is a board of directors to oversee corporate affairs and decisions, but not the more granular processes. Shareholders cannot manage business affairs, but the director can elect officers to manage the business.
How LLCs and S-Corporations handle taxes can be the deciding factor for many entrepreneurs. S-Corps are structured so that the business owner is an employee, and paid a set salary. Taxes are withheld, just like any other employee, and business earning outside of the salary can be treated as unearned income, and not considered part of self-employment taxes. An LLC does not have such a structure.
Whichever business structure you decide upon for your organization, discuss the details with your attorney and accountant to go over the specific guidelines for your state, and if there are any additional restrictions or benefits.