LLC Vs. S Corp Profit Sharing

By Timothy James

A limited liability company, or LLC, and S corporation are both popular business structures that usually protect their owners from liability in their personal capacities. An LLC's owners are referred to as "members," while an S corporation's owners are referred to as "shareholders." Whether you're picking the appropriate entity for a business or trying to divide the profits of an existing business, you'll need to carefully consider the profit sharing rules that govern both forms of ownership.


The Internal Revenue Service allows both LLCs and S corporations to function as disregarded entities, meaning their corporate structure is disregarded for tax purposes. In other words, the corporate entity doesn't pay taxes. Instead, profits and losses pass through to the owners, who are taxed at the individual level. This means that profits are only taxed once, minimizing the overall amount of taxes paid in many circumstances. LLCs may also elect to be taxed at the corporate level.

S Corporations and Profit Sharing

The owners of an S corporation can only issue a single type of stock and must distribute profits to shareholders based on the percentage of stock owned by each. For example, if a shareholder owns 30 percent of stock in a company, he must receive 30 percent of the profits for tax purposes. Failure to keep this rule prompts the IRS to set aside the S corporation's favorable tax status.

Ready to start your LLC? Start an LLC Online Now

LLCs and Profit Sharing

When an LLC elects to do business as a disregarded entity -- meaning it does not pay corporate taxes -- its members can divide profits as they see fit. For example, one member may own 75 percent of the business but agree to receive only 50 percent of the profits. Members who invest more time or money into the LLC can legally receive more of its profits, regardless of the percentage owned by the member.

Owner Compensation

When an owner of an LLC works for the LLC itself, he is considered self-employed and his compensation is deemed an equity distribution from the LLC. By contrast, when a shareholder works for an S corporation, he is considered an employee and his compensation is deemed a wage, just like any other employee. Thus, his compensation does not affect the proportion of profits he receives when it comes time for profit distribution.

Ready to start your LLC? Start an LLC Online Now
Tax Differences of LLCs & PCs


Related articles

Massachusetts LLC Vs. S Corp

An S corporation, or S corp, and a limited liability company, or LLC, are two business entities offering liability protection that people often consider when forming a business in Massachusetts. Both of these business structures restrict the owner's liability to the amount of his investment in the company. There are several differences between the two entities, including how they are formed, how they are taxed and how they must be managed.

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.

LLC Pass Through Taxation

Corporate entities are frequently subject to double taxation, which means that money earned is taxed at two different times. LLCs are often attractive business structures for small business owners because LLCs may elect a pass through taxation. Though the cornerstone of an LLC is its limited personal liability for the managers or members, the availability of pass through taxation is one of the LLC's biggest advantages.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

What's an LLC?

An LLC, or limited liability company, is a flexible form of business entity that provides its owners with the safeguard ...

Base Salary Vs. Equity Split in an S-Corp Partnership

Business owners are able to also work in their business as employees. This means they can earn wages or base salary, ...

Tax Planning for an S Corporation

If you incorporate or create a limited liability company (LLC) for your small business, you may be able to designate it ...

What Does a Limited Liability Company Mean?

A limited liability company, or LLC, is a hybrid business form created by state statute. The LLC combines the corporate ...

Browse by category
Ready to Begin? GET STARTED