The Pros and Cons of an LLC vs. an S Corp. in Virginia

By Edward A. Haman, J.D.

The Pros and Cons of an LLC vs. an S Corp. in Virginia

By Edward A. Haman, J.D.

The pros and cons of a limited liability company (LLC) and an S corporation (S corp.) formed in Virginia vary, depending upon the particular needs of your business. To decide between the two, you'll want to understand the similarities and differences, and the basic pros and cons of each.

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Limitation of Liability

Both an LLC and an S corp. offer limitation of personal liability for the owners. Generally, under this protection, an owner cannot be held personally liable for the debts of the business. This means that a person suing the business cannot go after the personal assets (such as home, car, personal bank account) of a member of the LLC or a shareholder of the S corp.

Formation Requirements and Costs

An LLC is formed by filing Articles of Organization (Form LLC1001) with the Virginia State Corporations Commission (SCC), and paying a $100 filing fee. Although not required by law, it's advisable to have an LLC operating agreement, which provides details about the operation of the business.

An S corp. is formed by filing Articles of Incorporation (Form SCC619), with the SCC, and paying a $25 filing fee. There is also a charter fee, based on the number of shares of stock that will be issued, which varies from $50 for up to 25,000 shares, to $2,500 for more than one million shares. This process will create a C corporation. It will then be necessary to file IRS Form 2553 (Subchapter S Election) to convert to an S corporation. Virginia law requires corporations to hold an organizational meeting to choose officers and directors, and adopt bylaws.

Fees and Reporting Requirements

LLCs pay a $50 annual registration fee. There are no requirements for annual meetings or annual reports.

An S corp. must file an annual report and pay an annual registration fee of $100 to $1,700, depending upon the number of authorized shares of stock. It must also hold an annual meeting of shareholders, keep minutes of meetings, and notify the SCC of any changes in directors or officers.

Ownership

LLC owners are called "members." A member's ownership interest is documented in the records of the LLC, including in an operating agreement if the LLC has one. An operating agreement may give different rights to the various members, such as different rights in the allocation of profits and losses, and in voting. Members may be individuals, corporations, other LLCs, or other business entities.

Owners of an S corp. are called "shareholders" or "stockholders." A shareholder's ownership interest is documented in the records of the corporation and by a stock certificate that is kept by the shareholder. S corporations may only issue one class of stock, giving equal rights to all shareholders. An S corp. is limited to 100 shareholders, all of whom must be individual persons who reside in the United States—no corporations, LLCs, or other business entities are allowed to hold stock.

Management

An LLC may be managed by members or by hired managers. If managed by one or more of its members, it is called a "member-managed LLC." If it has hired managers, who are generally not members, it is called a "manager-managed LLC."

An S corp. usually has a two-tier management structure. The shareholders elect a board of directors from among the shareholders. The board of directors may then hire officers who are responsible for the day-to-day operation of the corporation.

Profits and Losses

LLCs may give different rights to different members. For example, if an LLC has four members who each contributed the same amount of capital to the startup, the operating agreement does not necessarily need to give each member 25 percent of the profits.

An S corp. must allocate profits equally among all shareholders according to the number of shares of stock they hold. For example, if profits are $100 per share, each shareholder must be allocated $100 for each share owned.

Taxation

Both LLCs and S corporations are considered “pass-through" entities. The business itself does not pay tax, but its profits or losses are “passed through" to the shareholders or members, based on each person's percentage of ownership. The shareholder or member reports their profit or loss on his or her personal state and federal tax returns, regardless of whether any profits are actually paid to them.

An LLC with only one member can choose to be taxed as a sole proprietorship or as a corporation. If taxed as a sole proprietorship, the sole member will be subject to self-employment tax in addition to personal income tax. An LLC with two or more members can choose to be taxed as a partnership or as a corporation. Either type of LLC can choose either the S corp. or C corp. option.

Basic Pros and Cons

Unless you want to issue a lot of shares of stock, the initial fees and annual fees are similar for both entities. An LLC is more simple in terms of formation and annual requirements; and it is more flexible and less formal in terms of who may be an owner and how management, record keeping, and the allocation of profits and losses are handled. On the other hand, an S corp. is better suited to raising capital by issuing more stock certificates to new investors. For more information see the Virginia State Corporation Commission website.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.