S Corporation vs. LLC

Published: January 16, 2018 at 14:29 by Renate Harrison

Many small business owners choose between an S corporation and a limited liability company (LLC) when choosing a formal legal structure for their business. Both LLCs and S corporations offer their owners limited liability protection. If you run your business as a sole proprietor, then business creditors can reach your assets even if those assets have absolutely nothing to do with the business. Forming an LLC or S Corp greatly limits your liability. So which entity is right for your small business?

S Corporations

An S corporation is a regular business corporation that elected a special tax treatment with the IRS.

Where the s corporation differentiates itself from the traditional corporation is the pass-through taxation benefit. This enables the S corporation to be taxed in much the same fashion as a partnership, with no company-level taxes (other than in those states that charge franchise fees regardless of the formation type of the company). There is also a limitation placed on the number of shareholders an S corporation. Further, the shareholders in the corporation must be U.S. Citizens or Permanent Residents in good standing at the time of stock acquisition.

S Corporations however are subject to the same stringent organizational requirements as corporations, and this means that they must also establish and abide by the corporate formalities that any corporation is subject to. These corporate formalities are a necessity when operating as a corporation in order to properly enjoy limited liability and to maintain the integrity of the “corporate veil”–a hallmark of the separate entity status of the corporation.

Limited Liability Companies

A limited liability company (LLC) is a business entity that can be formed by one or more persons or other business entities.

Once an LLC is formed, the LLC (not its owners in their personal capacity) will enter into all contracts, issue all invoices and undertake all business activities.

The LLC form allows for an unlimited number of shareholders (known as “Members”) to enjoy similar tax advantages and protection from liability as a corporation. Further, unlike an S corporation, the LLC is not subject to the traditional corporate formalities and thus enjoys a number of management and organizational flexibilities that are not available to an S corporation. These advantages would not be available to the company if it formed as a simple partnership or a corporation. The major tax advantage, of course, is that of the pass-through taxation. The profits or losses of the company pass directly through to the members and are not subject to company-level taxation.

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