Are you just starting a new business or you’re thinking of transforming your business structure, the first decision that you need to make is to compare S Corp vs. LLC. There are many features which are similar between S Corp and LLC and at the same time, there are differences too. Before you go on to decide which one is the better one for your company and which may be the right option for you. Read on to know more.
LLC and S Corps – What are the similarities?
It is true that S corps and LLCs have certain things in common. If you’re not aware of them, here are some factors.
- Protection against limited liability: With both business structures, the owners are actually not liable personally for business obligations and debts.
- Different entities: Both of them are separate or disparate legal entities which are designed by a state filing.
- Pass through taxation: Both these legal business entities are pass-through entities and though S corps file a business tax return, LLCs only requires filing business tax returns when there is more than one owner. Since these are pass-through taxation, no income taxes will be paid at the commercial level. The profit and loss of the business will be passed to the individual tax returns of the owners. Any important tax is paid and reported at a personal level.
- Ongoing requirements of state: Both these business structures are answerable to and should abide by few state-mandated formalities like paying required fees and filing yearly reports.
Formalities and ownership – The differences
Ongoing Formalities – S Corporations face an extensive type of internal regulations and formalities. LLCs are recommended that they follow formalities but they are not required to do the same.
- Few of the formalities which are required for the S corporations are issuing stock, adopting few laws, organizing shareholder meets, keeping records of meeting minutes and corporate records.
- Few of the formalities which are recommended for LLCs include issuing shares for membership, adopting an operating agreement and documenting annual meetings.
Ownership: The IRS actually controls ownership of S corporation but not that of the limited liability companies. Few of the IRS restrictions are mentioned below:
- There is no limit to the number of members that an LLC can have and S corps are limited to just 100 shareholders or who can also be called owners.
- Non-American citizens can even become potential members of LLCs and on the other hand, S corps might not keep non-American citizens representing their shareholder community.
- LLCs are all permitted to open up subsidiaries without any limits.
- S Corporations can’t be owned by C Corporations or trusts, partnerships or other S corporations or LLCs. But this isn’t the case with the LLCs.
Therefore, if you’re still not sure about which business structure to choose for your business, weigh the pros and cons of each kind and then opt for them so as to end up choosing the most appropriate one.