What Is the Difference Between an LLC & an S Corporation?

By Jennifer Mueller

Both a limited liability company, or LLC, and an S Corporation, or S-Corp, offer an owner limited liability protection. An S-Corp is a corporation that qualifies under subchapter S of the U.S. Tax Code to be taxed as a partnership rather than as a corporation. An LLC can elect similar tax status, but without the regulations and restrictions inherent in the corporate form.


Tax status is considered a disadvantage of incorporation, according to the Small Business Association. Corporate income is taxed, then shareholders are individually liable for income taxes on any dividends they receive, resulting in double taxation. Subchapter S allows corporations to be taxed as partnerships, potentially avoiding double taxation provided the corporation maintains all the subchapter’s requirements. Since an LLC is not recognized as a business entity for federal tax purposes, an LLC must elect its own business entity classification, and can file as a sole proprietorship or partnership.


An LLC is a hybrid business structure allowed by state statutes, while an S-Corp is a type of corporation governed by federal and state laws. Owners of an LLC are called “members,” and can include individuals, corporations and other LLCs. In contrast, shareholders of an S-Corp cannot be partnerships or corporations, according to IRS regulations. Furthermore, as of November 2010, an S-Corp is limited to 100 shareholders, while there is no limit to the number of members an LLC can have. The Small Business Association notes that an S-Corp is usually more expensive and time-consuming to form than an LLC or partnership.

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An S-Corp, like any corporation, is an independent entity separate from its owners. As such, an S-Corp essentially lasts in perpetuity and does not dissolve when ownership changes. In contrast, an LLC’s duration is limited, and is typically specified when the LLC is organized, although members can elect to continue an LLC for an additional term after the original term expires. An LLC always dissolves with any change in ownership.


An S-Corp must fulfill the same reporting and records requirements as other corporations, and must have regular meetings of directors and shareholders. An S-Corp must also continuously meet all IRS requirements to maintain subchapter S tax status. Notably, if a shareholder works for the S-Corp, he must be paid market-value compensation for his services. This requirement does not exist with LLCs, which also typically have far less rigorous record-keeping and reporting requirements than corporations.

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What Does a Limited Liability Company Mean?


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Tax Differences of LLCs & PCs

A limited liability company is a company, typically with a small number of owners, known as members, that enjoys the same limited liability benefits as a corporation. All states now allow one-member LLCs; some states allow professionals to form professional limited liability companies, or PLLCs. A professional corporation, or PC is a special type of corporation designed for professionals such as lawyers and accountants. LLCs and PCs are taxed quite differently.

Can I Convert My LLC to an S-Corp When Filing My Tax Return?

The IRS applies default rules to determine how an LLC will be taxed. In general, a single-member LLC is taxed as a sole proprietorship, but a multi-member LLC is taxed as a partnership. Either type, however, can choose to be taxed as a corporation by filing the appropriate forms.

Switching Ownership of the S Corp

An S corporation begins its life as a regular corporation. At some point after creation, the corporation makes a Subchapter S election with the Internal Revenue Service for special tax treatment. To be approved, the corporation must meet the IRS eligibility requirements. S corporations remain subject to the laws of the state as they apply to all corporations, including laws on transfers of ownership. If the change in ownership destroys its IRS eligibility, the corporation will automatically lose its S corporation status.

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