LLC vs. S Corporation: What’s the Difference?

Both the LLC and the S corporation are two forms of business structure that the individual can choose to form while framing his business. Forming such business structures is mandatory for the success of the business. The LLC is a type of business entity whereas the S corporation is a tax classification. There are other significant differences between an LLC and an S corporation.

A limited liability company and S corporation

A limited liability company is a business entity that protects its owners from litigation. It is a legal designation that protects small businesses from personal liabilities in business obligations. An LLC can have either a single owner or many members and it follows a formal business structure. They are much more flexible than corporations when it comes to organization and distribution of profits. The LLC is free to choose its taxation structure similar to a corporation and its owners can save their tax money by electing an S Corporation tax status. 

S Corp stands for subchapter. While forming a business, a C-corp is created and the business should meet certain requirements to be S-corp classified.  This is a tax classification that protects the assets of the owner from double taxation. It generally follows pass-through taxation methods, in which the owner claims the profit share on their tax return. Thus, the profits of the business are protected from being double-taxed. The owners of the S-corp are the employees of the company and pay themselves a reasonable salary for the work they contribute. They will pay the income tax, Medicare tax, and social security tax from their salary. The owners will also get profit distributions, that are not subjected to social security and Medicare taxes. 

Differences between LLC and S Corporation

S. No Parameter LLC S Corporation
1. Ownership Structure  Unlimited owners with no restrictions on nationality 100 or fewer owners who should be US citizens or US-based trusts
2. Employment of owner Owners can either participate in the management or handoff.  Owners take a salary as a company employee.
3. Management Managers run daily operations and can also appoint officers as required Shareholders will choose a board of directors and elect officers to run the daily business.
4. Stock and shareholders. There are no stocks and shareholders in an LLC It involves common stocks with shareholders enjoying voting rights.
5. Tax liability The owners of the LLC pay self-employment tax on the net profits.  Owners will take a salary and avoid self-employment taxes on their profits. 
6. Cost of establishing the business The formation fees of an LLC vary from state to state and it ranges from $50 to $500. The fee for forming an S corporation ranges from $100 to $250.

Forming an LLC is better for a single-owner business and a partnership business. It is appropriate for business owners looking for flexibility in their business operations. It also requires minimal paperwork and doesn’t require extensive investment. In short smaller and simpler businesses form LLCs and larger and complex businesses create S corporations.