The S Corp VS LLC. Which one should you choose?
Choosing a business entity can bring much confusion for the new entrepreneur. However, it’s important to understand your options so you know best how to protect yourself and your business.
First, understand that a business entity is a way the business is organized. This doesn’t define what the business does, just simply what the type or structure of the business is. Keep in mind there are various types of business entities, however, for today’s focus, we’ll be comparing just two – the S Corp vs an LLC.
Definition of S Corp and LLC
The S Corporation Defined
According to the IRS, “S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.”
Put simply, an S-corp actually indicates how a business is taxed. It is essentially a pass-through entity.
The LLC Defined
A limited liability company (LLC) is a business structure that serves to protect the owner from the company’s debts or liabilities. Also possible to act as a pass-through entity, the LLC can be taxed in a variety of ways.
The S Corp vs LLC
Extra Layer of Legal Protection
Both an LLC and an S corp can provide a legal separation between the owner and the business’s debts and liabilities. The actual entity is considered the “owner” of the business, and as such, holds the responsibility for the debts and liabilities. As you can imagine, this brings security and peace of mind in the unfortunate possibility that a business transaction ever ends in a lawsuit. The owner’s personal assets will be untouched.
Both the S corp and the LLC can act as pass-through tax entities. With pass-through entities, the business itself does not pay taxes on the profit. Income is passed-through to the owners or shareholders and then taxed on a personal level. Most often, this proves a valuable tool for reducing the tax burden necessary on the entity’s profits.
Both an LLC and S corp have certain obligations that must be met each year in order to keep the corporation’s legal status, such as maintaining a registered agent, filing annual reports, qualifying to do business in another state, etc. However, this is where the differences begin to show.
What’s the difference between S Corp and LLC?
While there are certainly similarities between an LLC and an S corporation, there are also factors that set them apart.
Entity Obligations & Requirements
The extent of entity obligations varies between the two. S corporations have more reporting requirements, including adopting bylaws, holding initial and annual director and shareholder meetings, keeping meeting minutes with corporate records and issuing stock.
While LLCs have some similar recommendations, they generally are simply that – recommendations, not requirements.
Ownership rules represent another key difference between LLCs and S corporations. S corporations can have no more than 100 shareholders. LLCs are unlimited. All shareholders of S corporations must be U.S. citizens. LLCs may have international members. S corporations cannot be owned by any other entity, such as another corporation, LLC or partnership; however, LLCs have this possibility.
Ownership transferability differs between the two as well. While S corporation shares (stock) can easily be transferred, LLCs are not usually as simple. It generally requires the approval and cooperation of all the members.
An LLC can actually be taxed in different ways, depending on which entity it chooses for taxation purposes. An LLC can choose to be taxed as a sole proprietor or a partnership (and consequently as an S corporation). Since an S corporation itself is a form of taxation, there are no choices involved.
Determining which entity is the best fit for your business can be tricky. It’s important to talk to your business attorney as well as your tax accountant. With collaboration, this group of trusted advisors can come up with the best plan for your business structure that can bring you protection, legal tax deductions and operational success for years to come.
Call us today to talk about what’s best for your business!