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Understand The Difference Between S corp. And LLC Business Structure

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Business structures are of different kinds like sole ownership, partnerships, corporation, and LLC. However, the pros and cons of every structure are different. Before you take first step in changing business structure or starting a new one understand ‘what is a Sub S company?’

Small C corp. which meets specific requisites and has been elected for taxation as pass-through entity, according to subchapter S of IRC {Internal Revenue Code} is a sub S corp. Small businesses owners, who find this structure beneficial can vote in harmony for being taxed as S corp. and file the IRS form 2553.

Why accept S corp. status? Let’s understand this by comparing LLC vs. S corp.

Similarities

Personal asset protection

Both are regarded as separate entities and so owners are not individually liable for business related lawsuits and debts.

Pass-through taxation

Both are pass-through tax entities. It is obligatory for S corp. to file business tax turns but LLC with more than one member/owner has to file business tax returns. However, no taxes are paid at business level. The business loss or profit goes directly to the owners and their share gets paid on individual level.

Ongoing legal requirements

Ongoing mandated requirements differ from one state to another. Formalities include paying necessary fees and filing annual reports.

Dissimilarities regarding ownership and formalities

IRS restrictions for ownership are –

  • LLC can have unlimited members, while S corp. can have maximum 100 owners [shareholders]
  • It is obligatory for S corp. to have US citizens but LLC can include non US residents as members.
  • S corp. cannot be owned by C corp., other S corp., partnerships, LLC, or any trust. LLC has no such limitations.
  • LLCs can have subsidiaries without constraints.

Ongoing formalities for S corp. are very extensive but LLC is not obligatory to follow the internal formalities.

S corp. has requisite formalities like –

  • Adopt bylaws
  • Issue stock
  • Hold first and annual director & shareholder meetings
  • Keep records of corporate meeting minutes

LLC has recommended formalities like –

  • Adopt operating agreement
  • Issue membership shares
  • Hold and document annual member meetings
  • Document major business decisions

Management differences

  • LLC owners can select other members or managers to manage LLC operations. Members-managed LLC seems like partnership and manager-managed LLC resembles a corporation [members are not involved in daily business decisions].
  • The S corp. has directors and officers group. Directors elect officers to manage daily business. They handle major decisions and oversee other corporate affairs.

Transferability difference

S corp. share is easily transferable but LLC ownership needs approval from the other members.