What’s the Difference Between an LLC and an S-Corp?

Which makes more sense for you?

Entrepreneurs launching their business often run into problems trying to pick an entity that best suits their business or start-up. We have encountered many people who can’t differentiate from S-Corps and LLCs, because they are similar in a lot of key ways. The main difference between the two is that an S-Corp is a subset of a C-Corporation and an LLC is a different type of business entity. Making the distinction between the two isn’t easy which is why we want to break it down:

LLC

An LLC stands for limited liability company and it is the most common business structure for start-ups and new businesses. As the name suggests, An LLC offers limited liability for the owners should they be sued or accrue debt.LLCs are viewed much like sole proprietorships in that LLCs have a looser structure than either C-Corporations or S-Corporations when it comes to management rules and regulations. There is no limit to how many owners an LLC can have, but an LLC can’t go public like a corporation could.

When it comes to taxes, LLCs allow the taxes to “pass-through” to the owners, so the business is only taxed once. The owners will pay taxes on their share of the business profits as their own personal income. You can choose to be taxed differently, like corporations, should you choose to.

S-Corps

An S-Corporation is a tax classification under a C-Corp, so in most ways, an S-Corporation is structured like a C-Corporation. Corporations have a rigid structure when it comes to management in that corporations must have a board of directors and management officers, as well as hold annual meetings and reports for shareholders. Owners of a C-Corp must also pay themselves a reasonable salary. An S-Corp varies from a traditional C-Corporation by limiting the number of possible owners to 100, US citizens or residents.

S-Corporations, like an LLC, is a pass through entity that allows taxes to only be paid at the personal level. C-Corporations are taxed twice, once at the business level and once at the personal level. This is why certain businesses will file as an S-Corp instead of a C-Corp.

The Gist

LLCs and S-Corporations both have their benefits, and even share some of the same benefits. The big difference you should consider when deciding between an LLC or S-Corp is how you want your company to be structured. If you prefer the looser feel of a sole proprietorship, an LLC may be a better option because there are fewer regulations on management structure and tax status. If you like a firm structure, with a board of directors, corporate officers, and stock options, then an S-Corp might be the better choice.

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