S Corp vs. LLC: How the Two Business Entities Compare

An S corp (or S corporation) forgoes paying corporate taxes by encouraging shareholders to pay taxes on an individual level. They do so by reporting income on their personal income tax returns as permitted by subchapter S of the Internal Revenue Code.

To obtain S corporation status as a legal entity and all the tax advantages and liability protections available as a result, S corps must file forms and abide by certain practices in accordance with federal and state laws.

On a more broadly corporate level, even though S corporations might sound similar to C corporations (or C corps), they’re still different types of corporations with a distinct tax status. The primary difference is C corps pay corporate income taxes and S corps do not.

A type of business entity, a limited liability company (LLC) provides increased legal protection to both large and small business owners as well as fewer tax requirements. The Internal Revenue Service (IRS) treats LLCs as a disregarded entity, meaning owners pay state and federal income taxes on their own individual tax returns rather than for the LLC itself.

As such, LLC taxes can be less onerous than the corporate levies required for other entities. As an example, the tax benefits for a single-member LLC are similar to those a more traditional normal sole proprietorship enjoys but with the added benefit of increased legal liability protection. Forming an LLC also requires owners to jump through fewer legal hoops than would be necessary for other forms of incorporation.

S corps and LLCs share certain elements in common, but there are quite a few points of distinction worth noting. Here are seven key areas of difference between an LLC and S corp:

1. 1. Ability to issue stock: S corps can issue a specific class of stock (common stock), while both single-member and multimember LLCs cannot issue any stock whatsoever. S corps must ensure every share they issue offers an equal ownership stake no matter how big or small the total number of shareholders.
2. 2. Ease of establishment: The filing requirements for LLCs are slightly less onerous than those necessary for forming an S corp. As such, LLC establishment is simpler in general and requires its owners to follow fewer rules and regulations.
3. 3. General size: S corp status allows you to have up to one hundred owners, whereas there can be as many members of an LLC as the owners see fit. In other words, an LLC can expand from a single sole proprietor to a dual general partnership to an organization with hundreds of owners. Ironically, while LLC formation allows for more flexibility and expansion, these organizations are generally smaller than S corps overall.
4. 4. Management flexibility: A board of directors runs an S corp while LLCs rely on a management structure instead. An S corp election allows a number of members to oversee the company and to appoint managers to run day-to-day operations. In contrast, LLC managers have the ability to run the company themselves without reporting to any equivalent of these S corporation shareholders.
5. 5. Ownership structure: One of the key benefits of an LLC is the flexibility it offers to business owners. For example, the LLC owners can come from various countries—nonresident aliens and US citizens can manage the same LLC—and can run their company however they see fit. S corp owners, by contrast, must hold shareholder meetings, follow corporate bylaws, and all be US citizens.
6. 6. Specific legal requirements: While both S corps and LLCs must file forms with their home state’s Secretary of State, S corps must also file articles of incorporation. They must also pay a “reasonable salary” to each of their employees before making and sharing company profits.
7. 7. Taxes paid: S corps are responsible for payroll taxes and LLCs must pay self-employment taxes. Both avoid corporate income taxes by allowing owners to record income on their personal tax returns. Both also pay a host of annual fees to file taxes and keep their status as S corps and LLCs.

S corps and LLCs differ in many ways; however, they still share some important similarities. Keep these three in mind:

1. 1. Kindred structures: Your LLC can easily morph into an S corp if you begin to scale into a larger direction. Write your LLC operating agreement with future S corp eligibility in mind, given the fact one tax status might behoove your organization at one time while another might leave it better off in the future. It’s easy to make the shift given the similarity in the overall structure of both entities.
2. 2. Legal liability protection: Both S corps and LLCs provide a substantial degree of personal asset protection for their owners. This sort of limited liability protection ensures the owners of an LLC or an S corp will avoid any personal liability in the event of a lawsuit. In other words, their personal bank accounts, assets, and the like will not be on the table for seizure through the courts—only their LLCs or S corps will.
3. 3. Pass-through taxes: The tax classification for either type of entity enables owners to report business income on their individual income tax returns. This allows S corp and LLC owners to avoid double taxation (paying corporate taxes plus personal income taxes) and increase their state and federal tax savings as a result. On the flip side, both are still on the hook for paying Social Security and Medicare taxes.

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