A limited liability company LLC and S Corp have many similarities and differences. A limited liability company is a type of company that the state statute allows. There are different regulations in the state. Members are the owners of an LLC. In an LLC there is no maximum on the numbers of members that the company can have. An S Corp is a company that comes into existence through a tax election by the IRS. The main reason that people opt to make the domestic corporations into S Corps is the fact that they can avoid double taxation. The starting point for people is to charter businesses as corporations in the state that they expect to set up. Over time people have had confusion in differentiating between these two businesses. This paper examines the differences between LLC’s and S Corps based on ownership and formalities, management differences, self-employment taxes, ownership transfer and existence.
Ownership and Formalities
In terms of the ownership, the IRS does not allow for the S Corp ownership and when it does, it enforces some restrictions. In the limited liability companies, there are no restrictions from the IRS. The Limited liability companies can have many members but the S Corps should only have 100 shareholders or less. The S Corps may not have people from other places except the US while the LLC can have people from other nationalities (Stuart np). LLC’s can also have subsidiaries but the S Corp cannot.
In the LLC’s the owners of the LLC can have the members run and manage the company. In this case, the company runs like a partnership. When the owners of the company run it without help from other members, then the company is a corporation. In this case, the members of the LLC cannot make the decisions of the company. In an S Corp, the management comprises solely of directors. In some instances, the S Corp may have officers and directors. The BOD (Board of Directors) make all the decisions and they handle the corporate affairs of the company. The directors are in charge of selecting officers who are in charge of the firm on a day to day basis (McEowen 4).
An S Corporation has a perpetual existence. In LLC’s the state expects that the LLC’s will have a dissolution date when it submits its company documents.
The Self-employment taxes of the S Corp are preferable than those of the LLC. In the S Corp case, the owner is an employee and earns a salary. The owner in an S Corp also get dividends from the company profits. However, this differs from state to state (IRS np).
In an S Corp, it is easy to transfer ownership. The stock is easy to transfer. However, the company must meet all the ownership restrictions that the IRS has put in place. In a Limited Liability company, it is hard to transfer ownership of the company. The process is hard because there must be an agreement from all the members of the LLC.
In conclusion, there are many differences between S Corps and LLCs and entrepreneurs often feel confounded when they are deciding on their business. One of the advantages of having a business as an LCC is the fact that, an individual can protect his/her assets. â€˜Limited liability’ is where an individual is not financially responsible for the liabilities of the business. An individual is only liable for the investments in the company/firm. An advantage of having the business as an S Corp is the fact that every member earns a salary and dividends
Leave a Reply