Both Limited Liability Companies (LLCs) and S Corporations (S-Corps) are popular business structures in the United States, offering limited liability protection for owners. However, there are key differences between the two:
-
Taxation:
- LLC: By default, an LLC is a pass-through entity for tax purposes. This means that the profits and losses "pass through" to the owners' individual tax returns, and the business itself does not pay federal income tax. Owners report their share of the profits on their personal tax returns.
- S-Corp: Like an LLC, an S-Corp is also a pass-through entity. However, it has a specific tax election that allows it to avoid double taxation. Profits and losses flow through to individual shareholders' tax returns, similar to an LLC.
-
Ownership and Management:
- LLC: Typically, LLCs offer more flexibility in terms of ownership and management. Members (owners) can choose a member-managed structure where all members participate in decision-making, or a manager-managed structure where a designated manager or managers handle daily operations.
- S-Corp: S-Corps have stricter ownership requirements. They cannot have more than 100 shareholders, and all shareholders must be U.S. citizens or residents. S-Corps also have a more rigid management structure with a board of directors overseeing major decisions.
-
Limitations on Ownership:
- LLC: Owners of an LLC, known as members, can be individuals, other LLCs, corporations, or foreign entities without restrictions.
- S-Corp: S-Corps have limitations on ownership. They cannot have more than 100 shareholders, and shareholders must be individuals, certain trusts, or tax-exempt entities.
-
Profit Distribution:
- LLC: Members can allocate profits and losses in any way they choose, regardless of the percentage of ownership.
- S-Corp: Profits and losses must be allocated to shareholders based on their percentage of ownership.
-
Recordkeeping and Formalities:
- LLC: Generally, LLCs have fewer formalities and recordkeeping requirements. They are not required to hold annual meetings or keep detailed minutes.
- S-Corp: S-Corps have more formalities, including regular board meetings and the need to keep minutes.
-
Employment Tax:
- LLC: Members of an LLC are typically considered self-employed and are subject to self-employment taxes on their share of the profits.
- S-Corp: Shareholders who actively work in the S-Corp may receive a salary and are subject to payroll taxes, but they can also receive additional income in the form of dividends, which are not subject to self-employment taxes.
Choosing between an LLC and an S-Corp depends on factors such as your business goals, ownership structure, and desired tax treatment. It's advisable to consult with a legal and tax professional to determine the most suitable structure for your specific situation.