Most new entrepreneurs often get confused when it comes to choosing the business entity to get started. Both LLC and S-corps are well-known business entities and are being formed worldwide. Yet which one is better, it is yet to be discovered.
So if you too don’t know the difference and are confused about whether you should go for LLC or S-corporation. Then worry not and keep reading below as I have provided a detailed difference between both entities so that you can easily choose the one which suits you.
What is an LLC?
Limited Liability Company (US-specific Private Limited Company), often known as LLC is a type of legal business structure that limits the liabilities of the owner’s for most business obligations. Thus the owner is not personally responsible for the damage or bankruptcy of the company. LLC is often the first preference of small business owners due to the flexibility in their tax status.
As a startup, you can form an LLC by yourself or you can hire any of the top LLC formation services out there. If you want to form an LLC by yourself, remember its time taking and tiring job. Hiring an LLC service, such as Zenbusiness or Incfile, mostly saves both time & money. Therefore most of the experts recommend hiring a service.
What is an S-Corporation?
Unlike LLC which is a type of Business entity, S-corporation on the other hand is not a business but a type of tax classification. In an S-corporation, the company’s profit is passed through its owners and then each member reports his share to the S-corp which then charges income tax from each shareholder. A corporation and LLC, both are allowed to adopt S-corporation Taxation. If you need a closer look on the steps required for becoming an S Corp, check out this guide for a quick overview.
Differences between LLC and S-Corp
Ownership
The ownership of both LLC and S-corporation includes the following differences:
- There is no restriction over the amounts of shares in LLC which means LLC can have an unlimited number of members. Whereas S-corporation allows a company to have up to 100 members only and not more.
- LLC can be owned by anyone, either he is a U.S citizen or a non-U.S Citizen, while S-corporation can only be adopted by a U.S citizen, no foreigner is allowed to form an S-corp.
Taxation and Fees
LLC’s are taxed differently from other corporations. LLC limits the liability of business owners. An LLC is taxed in the same way as sole-proprietorship if there is only one member. However, if there are multiple members, then LLC is taxed as a Partnership. The profits and losses of a company are divided to each member according to his or her shares and then each member is taxed at their personal income tax rates along with them, the company is also taxed separately as it is subjected to federal income tax as a separate entity.
S-corporation tax classification, on the other hand, does not consider the company as a separate entity, hence the company is not subjected to federal income tax which means the tax is passed through the shareholders of the company and they are taxed at the personal income tax rate.
Business Operations
LLC’s are much more flexible on the account of business operation as they are not legally required to follow the bylaws. Instead, an LLC can form its own rules and regulations. However, as S-corporation is not a business entity but a tax classification, therefore the company that has adopted S-corporation would have to follow the bylaws and thus have many restrictions.
Which one should an Entrepreneur Go For?
Depending upon the nature of your business, you are free to choose them both. But if you want the taxation features of S-corp in your Limited Liability Company then you can also opt to adopt the taxation method of S-corp within your LLC.
Interesting Related Article: “Exploring the Financial Benefits of Forming an LLC“