The Difference Between S Corporations and LLCs

S Corporations and LLCs

When creating a business and choosing a business structure, it’s crucial to understand the differences between S corporations and LLCs, and the benefits and setbacks of each. While an LLC is a business entity and an S corp. is a tax classification, it’s important to be familiar with both concepts.

To get you started, here’s our guide on the difference between S Corporations and LLCs

LLCs Explained

limited liability company

When you legally establish a limited liability company, you protect yourself as a business owner from many business liabilities. An LLC prevents you from being responsible for your company’s debts. This means that if your business is sued for any reason, your personal assets won’t be in danger.

When you own an LLC you’re considered a member of the company. If you’re the only owner, your LLC is considered a single-member LLC. If you co-own the business with other owners, your business is considered a multi-member LLC.

In comparison to a corporation, LLCs offer more flexibility in profit distribution and organization. Additionally, an organization can simultaneously be an LLC and elect for S. corp tax status. However, before we go over the benefits of doing so, we first need to cover the basics of what an S corporation is.

S Corporations: The Basics

S Corporations

An S corp. is a tax classification that stands for “subchapter corporation.” When you establish a business that meets S corp. requirements, you protect yourself as a business owner from double taxation. Instead of being taxed once as a business and again as a member of your company, you will claim shares of company profits directly on your tax return. This is called pass-through taxation.

For your business to classify as an S corp., you must elect for S corp. status two months and fifteen days after legally creating your business. Your business is then limited to having 100 owners, and those owner shares must belong to U.S. citizens.

Benefits of Owner Employment

Both S corporations and LLCs have the ability to employ their owners and provide them with salaries. In some cases, it’s beneficial to reap the benefits of both and elect S corp. taxation for your LLC.

The Rules of Stock and Shareholders

While an LLC has no shareholders and cannot issue stock, an S corp. can issue common stocks, thereby establishing shareholders. If you have an LLC that qualifies for S corp. taxation, you must abide by LLC rules, meaning you still can’t issue stock.

Benefits of an LLC

LLCs can be useful if you want to avoid personal liability for your company, but don’t want the expenses and complications of forming a corporation. Another benefit of running an LLC is that there can be unlimited owners of the company.

Benefits of an S Corp.

If you’re looking to scale your business, S. corp. taxation might be the best move for your company. While they require more payroll systems and tax forms, it’s ultimately worth it if you’re running an expansive company on the path of rapid growth.

Overcoming entrepreneurial challenges can be tough, but when you’re knowledgeable about your options it makes things a lot easier. If you want to avoid personal liability, LLCs can be a great option. If your business is scaling fast, electing for S corp. classification might be for the best. That being said, if you want to understand the subject more fully, refer to the infographic below.

S Corp vs LLC: Which Is Best For Your Business?

Graphic courtesy of Legal Zoom

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