LLC vs. S Corporation: What’s the Difference?
One of the first orders of business when starting (or growing) a business to decide on a legal structure for how your entrepreneurial venture will operate. Among the most common business legal structures – especially for small businesses – is the Limited Liability Corporation (LLC) and the S corporation.
Let’s break down these legal structures so you can decide which one best fits the needs of your business.
An LLC is the second most basic type of legal business structure, being just a step above a sole proprietorship which ties you directly to your business. Instead, an LLC offers you both personal legal and financial protection by separating you from your business. Meaning, should your business come under legal fire or financial hardship, creditors and lawyers cannot come after your personal assets. Many sole proprietors (meaning one owner and sometimes a one-person business) choose to establish their business as an LLC for this reason.
Establishing an LLC is a straightforward and easy process and can be utilized by businesses of any size. From a small family run dry clearing operation, to multi-million dollar generating medical practices. Depending on your state and local laws, you may be able to register your LLC online in just a few hours.
An LLC is one of the most flexible types of legal business structures allowing no limitation on the number of members, and the ability to elect with the IRS to be taxed as a single member (a one-person business taxed on their personal tax return), taxed as a partnership if there are multiple members, taxed as a C corporation with an election, or even taxed as an S corporation.
An S corporation (also known shorthand as an “S-corp”)is a bit more in depth than an LLC. It provides the same protection as an LLC, but it is designed for business for which there are multiple owners, or “partners.” An S corporation can accommodate as many as 100 shareholders who receive profit shares which are taxed individually as personal tax returns. This saves business owners from being taxed twice at both the business and personal levels, which can happen with other business structures like a C Corporation.
Establishing an S-corp is more time consuming and can only be done when your business meets specific requirements set by the IRS. Your business must also have strict practices in place like governing bylaws and a board of directors.
The Difference Between LLCs and S-Corps
There are two main differences between these two types of legal business structures. The first is in regards to your business operations. The second is in regards to the intent to establish – why you want your business to be an LLC or an S-Corp.
Both an LLC and S-corp can be helpful in protecting your personal assets from financial and legal strain. Both legal structures will also protect you from double taxation.
Where they divide is in the operations of your business. An LLC lets you decide who owns and manages your business. An S-corp is governed by stricter rules which dictate their operating structure. An S-corp needs structured bylaws that govern how your business will operate. They also need a formal board of directors who will be in charge of running the business.
An S-corp also has stricter rules dictating members. Members must be US citizens and an S Corporation must have no more than 100 shareholders (excluding family attribution).
Annual filing fees can also differ between an LLC and S Corporation depending on what state the entity is formed. Some states have minimum franchise fees based upon how many shares of stock your S Corporation has issued which can cause unnecessary expenses for compliance (Delaware).
If you are looking for simplicity that also protects you from legal and financial hardship – go with an LLC.
If you are a large corporation with multiple partners, and are not afraid of formal corporation structure, you’re better off establishing an S-corp to protect your interests and the interests of your shareholders.
Need Help Establishing Your Business?
Unsure of which business structure is best for your business? Contact us today for a legal entity analysis. Together, we can get your business up and running. We know how!