What Are the Benefits of a S Corp vs. an LLC?

By River Braun, J.D.

What Are the Benefits of a S Corp vs. an LLC?

By River Braun, J.D.

The benefits of an S Corp. vs. a limited liability company (LLC) vary based on each entity's characteristics in terms of formation and overall operation. When deciding which business structure to adopt, owners often look to S corporations and limited liability companies because of the favorable tax treatment and limited liability they offer. Choosing which type has far-reaching consequences, so it's best to do some research before making a choice.

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Limited Liability Company Basics

It is perhaps the simplest structure to form in the United States and is often a logical next step from a sole proprietorship. Characteristics that distinguish an LLC from other business structures include:

  • Owners are called "members"
  • Can have as few as one member
  • Created with articles of organization or a certificate of organization
  • Governed by an operating agreement
  • Offers pass-through taxation with an option for corporate taxation
  • Offers limited personal liability for professional debts and obligations
  • Does not issue stock

Benefits of a Limited Liability Company

Aside from the obvious limited liability, this type of entity has a number of benefits that make it an attractive choice for many owners. These benefits include:

  • Pass-through taxation. There's no need to file a corporate tax return, as all profits and losses pass directly to the members, who avoid double taxation by reporting these numbers on their personal tax returns.
  • Options for foreign ownership. Unlike owners of other corporate forms, owners do not have to be U.S. citizens or residents.
  • Flexible operations. They do not have to follow the strict corporate formalities, such as annual meetings, expected of other corporate structures.
  • Greater credibility. Having this designation in your name lends credibility in the eyes of customers, partners, vendors, and lenders.

LLCs may not be available to certain businesses or may be subject to heavier regulations for certain professionals, such as doctors, accountants, and attorneys. Check with your Secretary of State's website for more information on state-specific regulation of this type of entity.

S Corporation Basics

S corporations are taxed under Subchapter S of the Internal Revenue Code. They have the following distinctive characteristics:

  • Restricted to 100 members
  • Restricted to one class of stock
  • Operations governed by bylaws
  • May have stockholders and a board of directors
  • May issue dividends to members
  • Business income, losses, deductions, and credits can pass through to shareholders
  • Pays taxes only for buily-in gains, excess net passive income, and last-in/first-out (LIFO) recapture tax

Some states, such as Tennessee, New Hampshire, and the District of Columbia, do not recognize S corp. entities. These states treat them as C corporations for state tax purposes. If you plan to operate in these states, consult a tax professional regarding tax ramifications.

Benefits of an S Corporation

Many of the benefits of forming an S corporation are the same as those of an LLC, including pass-through taxation, asset protection, limited liability, and more credibility than an unincorporated entity. Additional benefits for those who want a little more flexibility include:

  • Salaries and dividends for owners
  • Ease of conversion to a C corporation
  • Ability to issue stock

In contrast to LLCs, S corps. must follow the strict formalities of C corporations. For those owners who aren't concerned with issuing stock or raising equity, an LLC offers a simpler mode of operations. On the other hand, if the individual owners are concerned about their personal tax bracket, an S corporation has the option of being taxed at the corporate level, giving owners more flexibility in allocating income and losses for better tax rates.

Before choosing a business entity, consult with a tax professional. If you are ready to form an LLC or incorporate, you can visit your state's website to find out what is required of you.

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.