LLC vs S Corp: What’s the Difference?

Are you starting a business and trying to determine the proper business structure?

Choosing the proper business structure can be difficult, especially if this is your first time doing it. There are many types of business structures to choose from.

While they all have the same goal, they have different advantages and disadvantages. Learning about LLC vs S Corp can help decide which type of structure your business will be.

Different business structures exist, such as an S corp vs LLC. Here’s what you need to know about each.

Read on to learn more!

Legal Structure

Organizations’ most popular business legal structures are Limited Liability Company (LLC) and the S Corporation (S corp). LLCs are one of a business’s most flexible and valuable legal arrangements. They also offer protection from personal liability through limited liability.

LLCs don’t have to pay taxes on their income, which go straight to the owners. Since an S Corp is a corporation, the owners pay taxes on the income, like any other corporation.

But S Corps get some tax breaks that LLCs don’t get. S Corp owners only pay taxes on what they get from the company. LLC owners pay taxes on all their income, no matter what they get from the company.

Also, S Corps have to have a meeting at the end of the year, but LLCs don’t have to. LLCs and S corps must meet specific requirements to form them, so it’s essential to look at the law before making a choice.

Business Structure

LLCs are the most popular organization in the United States, so they are often used to start and run small businesses. An S Corp must be set up according to the rules of the state where they made it.

In an LLC, the owners are “members,” while in a S Corp, they are “shareholders.” The members’ or owners’ tax returns show how much money the business made or lost.

Also, there are more rules about who can own an S Corp and how its owners can run it. US people can only own it and can give one stock only. Both types of business plans have pros and cons that you should consider before picking one.

Ownership and Shareholders

Regarding ownership and shareholders, the essential difference between LLCs and S Corps is that an LLC can have infinite members (owners). In contrast, an S Corp can only have up to 100 shareholders. LLCs also have more options for how ownership is set up, but they can’t use stock as a reward for ownership.

S Corps can sell stock to shareholders and is a legal entity that can pay income taxes. They split profits and losses between the shareholders. Both offer limited liability from claims and is important business structure to limit the risk of personal harm.

A Shareholders’ Agreement sets out the terms of the relationship between the shareholders and the company. The shareholders must follow state regulations and IRS rules to stay an S corp.

Formalities and Compliance

Formalities for an LLC include having a formal meeting to set up the business, keeping good records, and giving out ownership certificates. LLCs are usually easier to run, but some states may have basic rules they must follow for the long term.

Formalities for an S Corp include having organizational meetings, keeping business records and meeting minutes, and filing reports every other year. To stay in compliance, you must also follow different IRS rules, such as wage pay rules and restrictions on stock transfers.

They must register with the state, get insurance and licenses, and file a report yearly. But LLCs are usually easier to keep up with because they don’t have to follow official rules.

S Corps must follow more formal rules, like choosing an officer or board of directors, making company bylaws and minutes, and giving out stock shares.

Profit Distribution

LLCs and S Corps are different legal structure of business structures, and each has unique characteristics when distributing profits. LLCs allow profits to be distributed in whatever manner the members decide.

This allows members to be treated differently regarding distributions, with some receiving more significant distributions than others. Additionally, standard LLCs pay taxes at the individual level, so they must report each owner’s profits on their taxes.

But, an S Corp can only distribute profits according to each owner’s ownership percentage. This means giving certain corporation members more significant distributions than others is impossible.

Furthermore, S Corps enjoy valuable tax benefits as the businesses profits are taxed at the corporate level rather than the individual level.

Creditor Protection

An LLC provides individual members with protection from company debts and liabilities. Unless members guarantee an obligation or something similar, creditors cannot go after the personal assets of LLC members.

An S Corp provides similar asset protection and creditor protection through shareholder liability. The main difference between the two entities regarding creditor protection is that S Corps limits their shareholders’ liability to the amount of money invested.

This means that if an LLC or S Corp is sued, the shareholder’s assets are safe from being used to settle any debts, regardless of how much they are.

Management Structure

Concerning management structure, LLC vs. S Corp has some notable differences. LLCs (Limited Liability Companies) are often managed by members of the LLC and allow for a more equitable and open distribution of ownership and decision-making since every member has a say.

On the other hand, S Corps (S Corporations) are managed by shareholders with equity in the company and the right to vote on significant decisions. The shareholder’s voting power in the company is determined by how much equity they own.
S Corps are legally bound to have a board of directors responsible for making decisions independent of shareholders.

Knowing the LLC vs S Corp

An LLC offers flexible taxation options and limited liability to its owners. An S Corp allows for a more formalized structure but has greater taxation and administrative burdens.

Ultimately, you should review both LLC vs S Corps carefully to decide which option is best for your business. Why not talk to a lawyer or accountant to help you decide?

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