An S corp vs LLC chart highlights the key differences between these two popular business entity structures that are often considered by entrepreneurs and small business owners. With many overlapping characteristics, there are also some distinct differences between S corps and LLCs when it comes to ownership, management, taxation, and other factors that may make one better suited for a particular business than the other. Understanding these key differences with the help of a comparison chart can help you make an informed decision when choosing a business entity type.
An S corp vs LLC chart shows the many similarities and differences between the two entities. They share characteristics in common such as pass-through taxation and liability protection. However, differences include restrictions on who can be the shareholders or owners of the company, qualifications, taxation, and management requirements.
Differences in Ownership Between an S Corp and LLC
LLCs and S corporations work differently with regard to ownership. S corporations have restrictions on who can be the owners, or shareholders, of the company. S corporations also have to pay salaries to any owners who work for the company if they own more than 2 percent. LLCs do not need to pay salaries to their owners, also called members.
LLCs are only allowed to have one class of stock, but if you want to establish a stock option plan for employees, it is easier to do with an S corporation than with an LLC.
Differences in Qualification Requirements for S-Corp Status
To qualify for S-corp status, a business must meet several specific IRS requirements. These include having no more than 100 shareholders who must be US citizens or residents, having just one class of stock, and prohibiting other corps or partnerships from being shareholders. Meeting these requirements is critical or a business risks losing its S-corp status and benefits.
There are many requirements for a business to be set up as an S corporation:
- The business must be a domestic corporation or an existing LLC
- The business must have only one class of stock and fewer than 100 shareholders. Individual family members such as spouses, siblings, cousins, parents, etc., may be treated as a single shareholder for this purpose.
- All shareholders need to be residents or citizens of the U.S.
- Other corporations and partnerships are not allowed to be S-corp shareholders, with the exception of certain tax-exempt corporations.
- Profits and losses must be divided among shareholders according to their percentage of ownership.
Differences in Stock Ownership Between S Corps and LLCs
Technically, an LLC does not issue shares of stock, which makes establishing stock option plans for employees complicated. It is also a complicated process to set up different classes of stock or ownership conditions with LLCs, and doing so requires special provisions in the operating agreement.
For this reason, investors prefer S corporations over LLCs. Since S corporations can only have one class of stock, however, and investors often want preferred stocks, many companies choose to convert to C corporation status when investments take place.
Differences in Management Structure Between S Corps and LLCs
Like C corporations, S corporations must have a board of directors, which is elected by their shareholders. The board, in turn, appoints officers, who manage the business’ day-to-day operations.
By contrast, an LLC can be managed by its members or a team of appointed managers. Like a partnership, LLCs can set up the management structure with their operating agreement. They may have a board of managers if they desire.
Similarities in Taxation and Liability Protection
One of the main similarities between S corporations and LLCs is limited liability protection; both entities protect owners from the debts and liabilities of their businesses.
Both LLCs and S-corps are separate entities from their owners that are created by filing with the state. Both must file annual reports and pay fees for continued authorization to do business in their states.
However, while S corporations have to file business tax returns, LLCs do not need to file a tax return unless there is more than one owner.
C corporations are subject to double taxation because owners are taxed on their distributions or dividends, and the corporation is also taxed on its profits. S corporations do not have this issue since all its income is passed directly to its owners.
Neither S corporations nor LLCs pay income tax on their behalf because both have what is referred to as “pass-through taxation.” That means any profit or loss is passed through to the owners’ personal tax returns, and owners must pay tax on this income themselves.
Shareholders of an S corporation must use Form 1120S to report their salaries if they have any, and use Schedule K-1 to report the distribution of profits. LLC owners report their income distributions on their own personal 1040 form, Schedule C, or Form 1065 along with Schedule K-1. If an LLC chooses to be taxed as an S corporation, owners follow S corporation tax reporting guidelines.
Aside from income tax, other taxes such as local tax, state tax or employees’ FICA and Medicare tax remain the same no matter what entity is chosen for a business.
Should You Choose S-Corp Status for Your Business?
If you run your own business or maybe you’re just starting out or confused about the distinctions between an LLC and an S corp or S corps in general, you’re in the right place.
The main factor to consider is whether or not you have sufficient profit to justify S corp classification. If your distribution after paying yourself a reasonable salary is greater than $10,000, you likely have sufficient profit to justify the cost and effort of maintaining an S corp.
S corps are a great choice if you know you’re going to make a lot of money in the form of distribution and you want to take all that money out of the LLC to pay yourself. If that is the case, an S corp is a good choice and will allow you to save on self-employment tax on that large distribution.
However, if you make a surplus of income and want to reinvest that amount into the company in the same year you made the money, you are better off staying as an LLC. This will avoid unnecessary income and employment taxes.
Lastly, if you have surplus revenue that you want to carry over and reinvest into the company but not immediately, perhaps over several years, you may be best suited by a traditional C corporation.
So in summary, weighing the key differences between an S corp and LLC with the help of a comparison chart can provide the insights needed to determine the best entity type for your business based on ownership, taxation, management needs, and other factors. Consult with legal and tax experts for advice on your specific situation.
Frequently Asked Questions
What are the ownership requirements for an S corp?
An S corp can have no more than 100 shareholders, who must be US citizens or residents. Other corps and partnerships can’t be shareholders.
How is an S corp different from an LLC?
Key differences are S corps have ownership limits, must pay reasonable salaries, can only have one class of stock, and require formal director/shareholder meetings.
The ability to minimize self-employment taxes by paying a salary + dividends, and established legal precedents since they’ve existed longer than LLC.
What are some disadvantages of an S corp?
More administrative requirements like payroll, formal meetings/records, and restrictions on ownership and stock classes.
How do I know if I should choose S corp status?
If you expect >$10k in profit distributions, want to minimize self-employment tax, and plan to take money out rather than reinvest, an S corp likely makes sense.