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.

Taxation

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.

Organization

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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Duration

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.

Regulation

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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C Corporation Vs. S Corporation Vs. LLC
 

References

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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.

S Corporation Passive Income Restrictions

An S corporation is a corporation consisting of 100 or fewer shareholders that has a special tax designation granted by the IRS. While this designation offers the shareholders certain tax benefits, it requires the company to adhere to several restrictions and conditions. One of these restrictions involves how much passive income the business earns. It is important for an S corporation to closely monitor how much passive income it earns to ensure that it avoids any IRS penalties or tax repercussions.

Advantages of LLC vs. an S-Corporation

A limited liability company (LLC) is a form of business organization authorized by state statutes to accommodate business needs for limited liability, pass-through taxation and operational flexibility. An S corporation is a corporation that enjoys limited liability, as well as pass-through taxation under Subchapter S of the Internal Revenue Code, as long as it meets certain standards. Each type of entity offers certain advantages.

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