Limited liability companies (LLCs) and Subchapter S corporations (S corps) have both become popular corporate forms for small business and start-up ventures, as both provide their owners, known as members in LLCs and shareholders in S corps, the protection of the limited liability shield. While many similarities exist between LLCs and S corps, these forms of corporate existence differ in several important ways.
What They Actually Are
An LLC is a special type of business entity created by state law, with a set of statutes in each state setting forth the rules of LLC creation and operation. An S corp, on the other hand, is a corporation organized under state law that files its taxes under Subchapter S of the United States Internal Revenue Code. "S corp," then, is not a specific type of business, but rather a filing status.
Although the rules regarding LLCs and corporations vary from state to state, the key elements of creation and operation for each type of entity remain similar across all jurisdictions. In general, an LLC requires its founders to file articles of organization -- and, in some states, an operating agreement -- and pay a fee. On a yearly basis, the LLC must file an annual report, which updates key company information such as addresses, names and addresses of members and managers and business activities. Corporations, on the other hand, must have a corporate charter and bylaws and may also require a shareholder agreement. Corporations are usually required to hold annual shareholder meetings during which, someone must keep minutes.
State law may allow partnerships and corporations as well as individuals to own shares in an LLC. Nonresidents of the state and foreign citizens may be LLC members. Under the rules applicable to S corps, membership is restricted to individuals, their estates and certain trusts. Partnerships, other corporations and nonresident aliens may not own shares. In addition, S corporations are limited to 100 shareholders under current law. Many states do not apply restrictions as to the number of LLC members.
Duration and Transferability
One important point of variation between LLCs and S corps concerns the degree to which interests in each type of entity can be transferred and how long they last. While an LLC is an entity with a legal existence separate from its members, some states do not allow members to sell or transfer their interests and some states specify that the LLC terminates upon the death or bankruptcy of any member. Shares in an S corporation, however, can be sold, given away and inherited. In the event a shareholder files bankruptcy, his shares become property of the bankruptcy estate.