Business owners can consider many entities when they are forming a business. One is a Limited Liability Company, or LLC. Another popular choice is a Subchapter S Corporation, also known as an S-Corp. Therefore, you need to weight the advantages and disadvantages of LLC vs. S Corp, to make an informed decision. Both of these choices are pass-through entities and they both provide liability protection, but they do have some differences.
LLC vs. S Corp: What Are the Differences?
An LLC and S Corporation share many features in common, but they are quite different. Make sure you know the difference if you plan to incorporate or form an LLC.
Before You Choose
Before you make a decision for your business, you must determine which of the features offered are more important to your business. Every company has its own needs, so you will want to discuss your alternatives with a knowledgeable attorney, in order to determine the best choice for you.
What Are LLCs?
Before you form an LLC, or limited liability company, you should understand them. LLCs are businesses structured in a similar way to partnerships. The IRS states that LLCs have the limited liability of a corporation, while retaining the flexibility and tax efficiency of partnerships.
Profits and losses pass to the LLC owners through the business. The owners or members report these profits or losses on their tax returns, but the LLC does not. Some states charge LLCs income taxes, however.
Pros and Cons of LLCs
One feature to consider when making a decision about LLC vs. S-Corp is the ease in operations of LLCs. There are fewer registration forms required and fewer costs associated with start-ups. Filing taxes occurs once a year with the members. LLCs do not have to have meetings or keep minutes. Profit sharing is easier within an LLC than an S-Corp.
LLCs are not the right choice for all companies. Whenever a member of an LLC goes through bankruptcy or dies, this dissolves the LLC. Many companies pre-determine the length of the LLC duration when they file the LLC paperwork in their state. If the company will eventually go public or issue shares, it will need to be converted to a corporate structure.
What Are S-Corps?
S-Corps are corporations that have received an IRS designation as Subchapter S businesses. They are unique by IRS rules, and separate from their owners. This means that there is a limit on financial liability for each owner.
Pros and Cons of S-Corps
S-Corps have their profits and losses pass through to the personal tax returns of the shareholders. The business itself is not taxed. S-Corps have tax savings for the business and shareholder, since only the wages of employees are subject to IRS employment taxes.
Some of the benefits received by employees or shareholders are allowed to be written off as expenses for the business. The business has a life that is separate from its shareholders. When shareholders leave the company, sell their shares or die, the S-Corp can be relatively undisturbed in continuing business as usual. There are clearer lines between shareholders than in LLCs, which offers the shareholders more protection.
You can learn more about LLCs vs S-Corps here.