LLC vs. S Corporation

Which to choose “LLC or S”?  Let’s compare the LLC vs S Corporation to answer the question.  An S Corporation has been one of the most preferred and popular forms of business structures in the United States for several years. Recently however, many business owners are realizing the benefits of a relatively new structure the LLC.  In comparing these two types of business structures you’ll notice several similarities and a few differences.

LLC vs S Corporation Terminology:

Owners are called:

In a LLC – Members or Managing Members
In a S Corporation – Shareholders


LLC – Articles of Organization
S Corporation – Articles of Incorporation

LLC – Operating Agreement
S Corporation – Bylaws

Restrictions on LLC vs S Corporation

SHAREHOLDER LIMITS: In the LLC vs S Corporation comparison, the LLC has no limit for the number or members(owners) according to IRS regulations.  A LLC can have an unlimited number of members (shareholders) and there is no restriction on who can own the LLC.  A business entity, alien or US citizen.

A S Corporation is limited on who the shareholders can be – they must be an individual with a Social Security number for tax purposes.  They can not be another entity or someone outside the country who doesn’t have a tax id number in the U.S.  With a LLC there are no restrictions on who can be a member – any individual U.S. citizen or foreigner or another business entity can be a member.  The S Corporation restricts to 75 owners according to the IRS regulations.

Form a LLC at a discount

LLC vs S Corporation Differences

PAPERWORK: Typically a LLC has less formalities required by the state such as annual meetings and resolutions.  However, it’s still a good idea to maintain corporate meetings and documents outlining activities of the business for tax purposes and for potential investors.

MANAGEMENT: LLCs are very flexible in how they are managed – you can either have the members run the business as a member managed LLC or hire someone to do so as a manager managed LLC.  The S Corporation has centralized management through a Board of Directors and Officers of the company.

TAXATION: When setting up a LLC you can choose the way you want the tax treatment set-up with the IRS on the IRS SS4(Application for Employer Identification Number).  A LLC has the choice of being taxed as a partnership (which is the default if no other option is selected), a sole proprietorship (also referred to as a disregarded entity  – the IRS says “If a “disregarded entity” is owned by an individual, it is treated as a sole proprietor. If the “disregarded entity” is owned any any other entity, it is treated as a branch or division of its owner.” or you can have the LLC taxed as a S Corporation or C Corporation.

The S Corporation is treated as a pass through entity for tax purposes.  Unlike a C Corporation where there are two tax brackets – one for the C Corporation and one for individuals, the S Corporation only has one.  Any profits in the company “flow through” to the individual owners tax return and are taxed at the individuals tax rate.

LOSS PASS THROUGH:  Both entity types allow losses of the business to pass through to the individual owners of the company to offset income/gains on the tax return. (See your accountant or CPA for specific details for your situation)

RAISING CAPITAL: Both entities are good for bringing in investors but neither is the preferred entity for going public.  A  C Corporation is still the entity of choice for public corporations.

LLC (Limited Liability Company)

LLCs are great business structures for small to medium sized companies.  It doesn’t matter if you are a one person operation or have several owners and employees, either way you can set-up a LLC  and gain the benefits associated with it.

To set-up an LLC you must file Articles of Organization with the Secretary of State.  You can choice any state you want for setting up the company.  However, it will cost you less money to just file in the state where your corporate or home offices are located or where you plan to do the most work.  Learn more about choosing a state.

About Brian Davis

LLC expert author and advisor. Has advised thousands of entrepreneurs over the last 15 years on which business structure is right for them. Brian is not an attorney or tax professional. If you need tax or legal advice, seek the assistance of a local attorney or CPA.

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