If you’re setting up a new business, you may be asking which is better, an S corporation vs. LLC. It’s a valid question, as both options have benefits to business owners.
The S Corporation and LLC Share Many Things in Common
Limited Personal Liability – Both structures protect your personal assets and limit your liability to the company. That means your personal assets, including homes, cars, savings, and investments, are protected from the liabilities and risks of the business.
Tax Flexibility – Both the S Corp and the LLC offer what’s called “pass through tax treatment.” Rather than having to file a separate tax document for your business, the way you would with a C Corp, you simply report your profit and loss for the business on your personal income tax forms.
You also save on taxes. When you operate as a C Corp, you’re taxed on the profits of the business, and then you as a shareholder are taxed on your dividends, so you’re essentially taxed twice. That’s not the case with the LLC or S Corp.
Ability to Raise Capital – Both structures allow you to borrow money and sell equity to raise capital. As an S Corp, you can issue shares of stock, while LLCs can sell interests in the company in accordance with its Operating Agreement. But be aware: because you can only have 100 shareholders as an S-Corporation, you may find it more difficult to use equity to raise capital as you grow.
Unlimited Duration – Both the LLC and S Corp will outlive you if you want them to. They’ll live on in perpetuity until you dissolve them.
How They’re Different – All those similarities aside, there are differences between the two structures you should be aware of when making your decision on the best business structure for you.
Number and Type of Owners – The LLC and S Corp have different restrictions on ownership. S Corps must be owned by individuals (or trusts) that are U.S. citizens or residents, and you’re limited to 100 shareholders. LLCs, on the other hand, may be owned by other LLCs or corporations, but the owners do not have to be U.S. citizens or residents. You can have an unlimited number of owners in an LLC.
Tax Treatment and Profit Distribution – An S Corp isn’t as flexible in its distribution of profits and losses as an LLC. In an S Corporation, you have to pay dividends to shareholders in proportion to share ownership. LLCs, though, can allocate profits and losses in any proportion they like to shareholders.
Corporate Structure & Formalities – The S Corp is a bit more rigid in its requirements in corporate formalities than the LLC. You’re required to file an Annual Report yearly, as well as hold meetings with your Board.
State Filings – LLCs do still require State Filings, though they are different from those for S Corps. Your Articles of Organization must be filed with the Secretary of State to form an LLC and the members of the LLC are required to enter into an Operating Agreement that governs how the LLC will be operated.
Which One is Right for You?
S corporations and LLC’s are not the only options available. You can explore additional options and learn more about each, but visiting our Business Structure Comparison Chart.
Choosing a business structure is a very important first step every business owner must take. The above link will help provide a high-level comparison of the most popular forms of business structures.
If you need further assistance, CorpNet is here to help!