LLC's and S Corporations

What are the Similarities?

• Both are separate legal entities that are created by a state filing.
• They offer the same limited liability protection, the owners are typically not personally responsible for the debts and liabilities of the business.
• 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.

What are the Differences?

• The ownership of an S Corporation is restricted; however, a limited liability company does not possess these same limitations.
o An LLC can have an unlimited number of members (owners) while a subchapter S Corporation is restricted to no more than 75 shareholders.
o Non-US residents can be members of an LLC while an S Corporation may not have non-US residents as shareholders.
o 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.
• LLCs are allowed to have subsidiaries without restriction. S Corporations are not allowed to own eighty percent or more of another corporation's shares.
• Formalities:
o 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.
o LLCs are not required to hold such meeting; however, it is a good idea to document major decisions of the company.
• S Corporations do have advantages. One person can form an S Corporation, while in few states at least two people are required to form an LLC.
• 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.
• 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.
• 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.