ENTITY TYPE DEFINITION AND COMPARISON
LLC - Limited Liability Company
The basic definition of an LLC is a business structure that is a hybrid of a partnership and a corporation. Its owners are shielded from personal liability and all profits and losses pass directly to the owners without taxation of the entity itself.
By definition, an LLC offers its owners the advantage of limited personal liability (like a corporation) and a choice of how the business will be taxed, making particularly popular with small businesses.
Although state laws governing creation of LLCs and IRS regulations controlling their federal tax status are still evolving, because of their flexibility LLCs are increasingly regarded as the small business legal entity of choice.
Articles of organization must be prepared and filed with the state and filing fees, initial franchise taxes, and other initial fees must be paid.
An S-Corporation is a standard business corporation that has elected a special tax status with the IRS. This tax treatment allows the corporation not to be a separately taxable entity. Instead, the income of the corporation is treated like the income of a partnership or sole proprietorship; the income is "passed-through" to the shareholders. Thus, shareholder's individual tax returns report the income or loss generated by an S corporation.
To be classified as an S corporation, a corporation must make a timely filing of Form 2553 to the IRS. This election must be made by March 15 if the corporation is a calendar year taxpayer, in order for the election to take effect for the current tax year. A corporation may later decide to elect S corporation status, but this decision would not take effect until the following year.
In order to qualify for S corporation status, the S corporation can have no more than 75 shareholders and must make the election to be an S corporation. The shareholders cannot be non-resident aliens. Also, an S corporation cannot issue preferred shares of stock with special liquidation, dividend, or conversion rights.
Articles of incorporation conforming to state law must be prepared and filed with the proper state authorities and filing fees, initial franchise taxes, and other initial fees must be paid.
Comparing LLC's and S-Corporations
1. Both are separate legal entities that are created by a state filing.
2. They offer the same limited liability protection; the owners are typically not personally responsible for the debts and liabilities of the business.
3. Both are pass-through tax entities - this means that the income or loss generated by the business is reflected on the personal income tax return of the owners.
1. The ownership of an S Corporation is restricted; however, a limited liability company does not possess these same limitations.
a. An LLC can have an unlimited number of members (owners) while a subchapter S Corporation is restricted to no more than 75 shareholders.
b. Non-US residents can be members of an LLC while an S Corporation may not have non-US residents as shareholders.
c. Also, S Corporations cannot be owned by C corporations, other S Corporations, many trusts, LLCs, or partnerships. Limited Liability Companies are not subject to these restrictions.
2. LLCs are allowed to have subsidiaries without restriction.
a. A corporation requires formalities, annual meetings of shareholders and directors are required each year and meeting minutes are required to be kept with the corporation's records.
b. LLCs are not required to hold such meeting; however, it is a good idea to document major decisions of the company.
4. A corporation's existence is perpetual. Conversely, an LLC typically has a limited life span. Most states require that an LLC list a dissolution date in its articles of organization and certain events such as the death or withdrawal of a member can cause the LLC to dissolve.
5. The stock of an S Corporation is freely transferable while the interest (ownership) of LLC is not - typically the approval of the other members must be received.
6. An S Corporation may have advantages with self-employment taxes in comparison with an LLC. For more information on this issue, please contact your tax advisor.
The information set forth herein was obtained from sources that I believe reliable, but I do not guarantee its accuracy.