LLC vs. S Corporation

woman thinking

For most small business owners choosing between an LLC and an S Corporation is the most common dilemma when picking a business structure. You should consider the advantages of both the LLC and S Corporation before you make your pick. Selecting the right structure from the start can help you maximize your chances for success. Here is a break down of the major differences to help you compare the two:

First, let's look at what is similar

  • Limited liability protection. Both entities offer a level of liability protection.
  • Separate entities. Both entities legally separate the owner(s) from the business.
  • Pass-through taxation. Both entities can be taxed as pass through entities. *LLCs require a special IRS tax election (additional filing)
  • Ongoing state requirements. Both entities are subject to filing annual reports and paying renewal fees.

What is Different?

IRS restrictions

  • S Corporations can have no more than 100 shareholders vs. LLCs can have an unlimited number of members;
  • S Corporations may not have non-U.S. citizens/residents as shareholders vs. Non-U.S. citizens/residents can be members of LLCs
  • S Corporations cannot be owned by other entities, such as Corporations or LLCs vs. LLCs may be owned by other entities

Maintenance

  • S corporations are required to: Adopt bylaws, issue stock, hold initial and annual director and shareholder meetings, and keep meeting minutes with corporate records.
  • It is recommended, not required that LLCs: Adopt an operating agreement, issue membership shares, hold and document annual member meetings/manager meetings and document all major company decisions.

Management

  • S Corporations encompass directors, officers and shareholders. A board of directors oversees corporate affairs and handles major decisions whereas the daily operations are managed by elected officers i.e. CEO, CFO, CIO etc.
  • LLCs can either opt to have members or managers manage the LLC. A member managed LLC is similar to a general partnership. Decisions are made in a consensus of all members usually by a vote. Whereas a manager managed LLC is similar to a corporation leaving members to act as more of a board of directors. 

Lifespan

  • S Corporations are perpetual and are not required to list a dissolution date.
  • LLCs in most states are required to list a dissolution date. Typically you can request an LLC to last for 99 years.