LLC vs. S Corporation

Choosing Between an LLC and S Corp

The Limited Liability Company (LLC) and the Subchapter S Corporation ("S Corp") share the benefit of pass-through taxation. This means that owners in the company report their share of profits and losses on each owner's individual tax return. The Internal Revenue Service (IRS) assesses no separate tax on the company itself. This is in contrast to the C Corporation, where "double taxation" occurs when the C corporation first pays taxes on its own earnings; shareholders then pay additional taxes on the dividends they receive.

Limited Liability Company Advantages

Though the tax status of an S Corp is similar to that of an LLC, the LLC can offer small business owners advantages over the Subchapter S Corporation:

• An LLC is typically easier to form. The state requirements for forming a corporation, and then electing to have it be taxed as an S corporation, are more complex and time-consuming than the simple filing of a Certificate of Formation or Articles of Organization needed to form an LLC. Unless they elect to do otherwise, single-member LLCs are automatically taxed as sole proprietors by the IRS. Similarly, LLCs with multiple owners are automatically taxed as partnerships at the federal level. No separate filing is required to elect pass-through taxation for an LLC. In contrast, after a corporation is formed it must file IRS Form 2553, "Election by a Small Business Corporation," within 75 days of the corporation's formation to obtain pass-through status as an S corporation.
• LLCs are not required to hold annual meetings or keep formal meeting minutes. Corporations, including Subchapter S Corporations, have a formal annual meeting and record-keeping requirement that LLCs do not.
• LLC owners don't need to worry about the formalities of issuing stock. A corporation must issue shares of stock as evidence of ownership, but an LLC does not issue stock.
• There is no limit to the number of members who may own an LLC. In contrast, Subchapter S Corporations are limited to a total of 100 shareholders.
• Members of an LLC do not need to be U.S. citizens or residents. In contrast, all S Corp owners must be U.S. citizens or residents.
• A company may be listed as the owner of an LLC. In contrast, all shareholders in a Subchapter S corporation must be individuals, so another company may not be a shareholder in an S Corporation. In an LLC there is no such requirement. An owner/member can be another LLC or other entity.
• An LLC does not need to distribute income in proportion to ownership. The shareholders of a Subchapter S corporation must receive dividends according to the number of shares they own. In contrast, LLC members may split profit and loss in any way they choose as long as they follow IRS guidelines for special allocations.

Note: LLC owners can elect for the IRS to tax the LLC as a sole proprietorship, partnership, C Corporation, or S Corporation. Owners make this election through the IRS after the company forms with the state.

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