Opting for an S-Corp over an LLC might be advantageous when multiple individuals run the company. The S-Corp structure provides oversight through a board of directors, ensuring a structured decision-making process. 

Moreover, members can serve as employees and benefit from cash dividends from company profits, offering a valuable perk in financial rewards.

What Is An LLC?

An LLC, or Limited Liability Company, is a flexible business structure combining elements of a corporation and a partnership. It offers limited liability protection to its owners (members) while providing the simplicity and flexibility of a partnership. This means the member’s personal assets are generally protected from the company’s debts and liabilities. 

An LLC typically has a more straightforward organizational structure and offers pass-through taxation, where business profits and losses are passed through to the member’s tax returns. To build a business, members must understand how to build lasting business partnerships. 

What Is an S-corp?

An S-Corporation (S-Corp) is a type of business entity that, similar to an LLC, provides limited liability protection to its owners (shareholders). The key feature of an S-Corp is its pass-through taxation, where business profits and losses are passed through to the individual shareholders’ tax returns. This structure avoids the double taxation associated with traditional corporations. 

S-Corps are restricted in terms of the number and types of shareholders, and they must adhere to specific IRS regulations to maintain their status.

LLC vs. S-corp

Parameters LLC S-corp
Liability Protection Provides limited liability protection for members, shielding personal assets from business debts and lawsuits. Offers limited liability protection to shareholders, separating personal assets from corporate liabilities.
Taxation Pass-through taxation, where business profits and losses are passed through to individual members’ tax returns. Pass-through taxation, similar to an LLC, avoiding double taxation at the corporate and individual levels.
Management Structure Flexible management structure with members or managers handling day-to-day operations. More formalized management structure with a board of directors overseeing major decisions and officers managing daily operations.
Ownership Restrictions Generally, there are no restrictions on ownership types or numbers. Can have individual or corporate members. Limited to 100 shareholders, who must be U.S. citizens or residents. No corporate shareholders, certain trusts, or partnerships.
Employee Benefits Members are not considered employees, so there are no traditional employee benefits. Shareholders can be employees, allowing for benefits like health insurance, retirement plans, and cash dividends from profits.
Formation Complexity Generally, it is more superficial and more flexible to form and operate. Fewer formalities in terms of meetings and record-keeping. More formalized with requirements for regular meetings, record-keeping, and adherence to bylaws.
Tax Reporting Members must report their share of profits or losses on individual tax returns (Form 1065). Income and losses flow through to shareholders’ tax returns (Form 1120S).
Ideal for Small to medium-sized businesses seeking flexibility in management and taxation. Small businesses aiming for pass-through taxation are willing to adhere to more formalized operational requirements.

How Do You Structure An LLC as An S-corp?

To opt for S-Corp taxation, submit Form 2553, Election by a Small Business Corporation, to the IRS. This filing must occur within 75 days of the start of the tax year the election becomes effective or at any time during the preceding tax year. Refer to the Form 2553 instructions for guidance on calculating the specific deadline for your business and completing the form accurately.

How Can a Business Attorney Help You In Choosing a Business Entity?

A business lawyer can provide invaluable assistance in choosing the right business entity by assessing your specific needs, explaining the legal implications of each structure, and guiding you through the complex formation process. Their expertise ensures you make informed decisions aligned with your business goals and legal considerations.

Frequently Asked Questions On LLC v/s S-corp

Transitioning from an LLC to an S-Corp can be appealing for an owner seeking tax advantages without navigating the corporate governance formalities imposed by state laws, such as appointing officers and holding board meetings. Opting for S-Corp status is particularly advantageous when the company's profits reach a level where the potential tax benefits outweigh the administrative complexities associated with the change in the tax structure.
S-Corp earnings are not typically subject to self-employment tax. Instead, S-Corp shareholders who are also employees receive a salary subject to payroll taxes. Additional earnings in the form of distributions are generally not subject to self-employment tax, potentially providing tax advantages compared to other business structures.
To form an LLC, you follow vital steps, including choosing a business name, filing Articles of Organization with the state, creating an Operating Agreement, obtaining necessary licenses, securing an EIN from the IRS, and opening a business bank account. This process establishes the legal framework and structure for the LLC.
There are various types of LLCs catering to different needs. Single-member LLCs (SMLLCs) are owned by a single individual, providing simplicity. Multi-member LLCs (MMLLCs) involve two or more owners with shared management. Manager-managed LLCs designate managers for larger entities, while Member-Managed LLCs involve active participation from all members, which is ideal for smaller ventures. Choosing the right type depends on ownership structure and management preferences.