Subchapter S corporations, or S-corps for short, and limited liability companies, or LLCs, are popular business structures for large and small businesses alike. Deciding which form makes the most sense for a given business requires an understanding of the similarities and differences between the two.
S-corps are those that meet the requirements of Subchapter S of the Internal Revenue Code, and are organized under the laws relating to the formation of corporations in their state of origin. As such, an S-corp is not its own form, but rather a tax filing status. An LLC is entirely a creature of state creation, and the rules and regulations for LLC formation and operation are separate from those governing corporations. The Internal Revenue Code does not recognize LLCs as separate entities, and these must file the proper elections in order to receive corporate tax treatment.
Number of Shareholders
Under the laws of most states, LLCs can have an unlimited number of members, although these entities tend to be small, closely held companies. Subchapter S of the Internal Revenue Code, however, limits the number of shareholders in an S-corp to 100 as of December 2010.
Documention and Operation
Although the rules governing LLCs vary from state to state, the documents required to create and operate them are generally minimal when compared to other corporate entities. Many states have made all the documents required to create an LLC available for free online, and operating agreements, while advisable, are optional in many jurisdictions. As a corporation, an S-corp is generally required to have a corporate charter, bylaws, a board of directors and annual shareholder meetings. The relative simplicity of the LLC has made it more popular with small business owners than incorporation and election to file for Subchapter S status.
Both S-corps and LLCs offer their shareholders and members the benefit of limited liability. This means that in the event of a lawsuit against the company for torts committed by company employees or other shareholders or members, the assets of individual members remain safe -- provided that the company and its managers have followed the proper formalities in the organization and operation of the business, the company will retain its status as a separate legal entity. However, both S-corps and LLCs can lose this limited liability protection in the event of failure to follow the proper formalities, poor operating or shareholder agreements, insufficient filings, missed deadlines, fraud or illegal activities.