Choosing the right corporate structure is crucial to the success of your business.
An LLC is a limited liability company that is a type of legal entity that can be used in incorporating a business. An LLC offers a more formal business structure than a sole proprietorship or partnership. It also offers the owner protection from personal liability for any debt a company incurs. In other words, the owner’s personal assets cannot be used for legal claims against the company. LLCs are common because they offer corporation-like liability, but they are easier to form.
While LLCs and S corporations are often discussed as two terms side by side, they actually refer to different aspects of a business. An LLC is a type of business entity, while an S corporation is a tax classification. It tells the Internal Revenue Service (IRS) that your business should be taxed as a partnership. To become an S corporation, your company must first register as a C corporation or LLC.
What is the Difference?
When starting a small business, people often wonder whether they should go for Limited Liability Companies (LLC) or S Corps. Well, both have their own advantages and disadvantages as well. Let’s look at some of the differences between the two here.
LLC will be a good choice if you are thinking about operational flexibility. You can choose S Corp if you really want to save on payroll taxes.
One of the main differences that can be seen between LLC and S Corp concerns the shareholders. In S Corp, shareholders are limited to 75 members. In addition, the shareholders must not be non-residents, nor should they be part of an LLC or other corporation. On the other hand, there are no limitations or restrictions on LLC membership. You have a flexible ownership structure.
Through the management of S Corp, the directors manage the company. On the contrary, LLC management is simpler and has no formalities like S Corp., unlike the S Corp, and members administer the LLC.
Another difference between LLC and S Corp is profit distribution. Upon distribution of profits in S Corp, there is no flexibility. The profit is usually divided according to the ratio of shares. On the other hand, there is more flexibility in profit distribution in LLC.
One of the noticeable differences between LLC and S Corp is payroll taxes. Because the LLC owner is considered self-employed, they must pay a payroll tax that goes to Medicare and Social Security. When calculating payroll tax in LLC, all net income is taken into account. Meanwhile, in S Corp, only the salary drawn from the owner is subject to payroll tax.
Summary
- In S Corp, shareholders are limited to 75 members. In addition, the shareholders must not be non-residents, nor should they be part of an LLC or other corporation. On the other hand, there are no limitations or restrictions on LLC membership.
- When distributing profits in S Corp., there is no flexibility, but profit distribution in LLC is more flexible.
- When calculating payroll tax in LLC, all net income is taken into account. Meanwhile, in S Corp, only the salary drawn from the owner is subject to payroll tax.