SMLLC Vs. S-Corp in California

by Joe Stone

SMLLC is a common designation for "single-member limited liability company," which is a type of legal business structure. Although state LLC laws originally required an LLC to have multiple owners, known as members, all states, including California, revised their laws to permit an LLC to have only one member. S-Corp is a designation that refers to a corporation that is taxed for federal income tax purposes under Subchapter S of the Internal Revenue Code. The SMLLC and S-Corp both provide tax advantages and liability protection for its owners, but different standards apply for setting-up and operating a business as an SMLLC versus an S-Corp.

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LLC Basics

California law provides for an LLC to be formed by filing appropriate documents with Secretary of State. The primary benefit to forming an LLC is that it provides similar benefits to forming a corporation and partnership. Like a corporation, an LLC protects the personal assets of its members from the debts of the business and, like a partnership, an LLC is not required to have a formal management structure. An LLC also offers its members a choice regarding federal income tax classification; that is, because the IRS does not have classification for an LLC, it can elect to be taxed as a corporation, partnership or sole proprietorship. The California Franchise Tax Board follows the same tax classification for an LLC as the IRS.

S-Corp Basics

The "S" in S-Corp only refers to how the business is taxed under the Internal Revenue Code. In California, the requirements for setting-up and operating an S-Corp are the same as for any corporation: it must comply with the California Corporations Code and the rules and regulations of the secretary of state. Like an LLC, an S-Corp is formed by filing appropriate documents with the secretary's office. However, S-Corp status is achieved by filing Form 2552 with the IRS. The purpose for electing S-Corp tax treatment is to avoid the double-taxation problem faced by a regular corporation, also called a C Corporation.

Tax Comparison

For an S-Corp to maintain its tax classification with the IRS, the structure of the S-Corp must adhere to strict standards set by the IRS. For example, the S-Corp cannot have more than 100 shareholders and its shareholders cannot be another corporation, a partnership, non-resident aliens or other specified persons. However, no such restrictions apply to an LLC. The IRS follows the rules of state LLC laws that generally do not restrict ownership of the LLC as to type of owner or the number of owners.

Management Comparison

The management requirements for an S-Corp under the California Corporations Code differ significantly than the management requirements for an LLC. Like all other California corporations, an S-Corp must follow corporate formalities such as having its shareholders meet annually, as well as having its board of directors meet on a regular basis. Records must be kept of all meetings and resolutions prepared to document important decisions of the board of directors. The S-Corp is required to appoint a president, secretary and treasurer, and have a specified number of directors. The management structure of an LLC is much more flexible. The California Limited Liability Act gives the LLC the option of being run by its members or appointed managers. The LLC is not required to hold regular meetings or appoint any officers.