Is a Limited Liability Company the same as S Corporation?
Introduction
If you are a business owner, you may be considering the choice between an LLC or S Corp. An LLC provides its members with limited liability protection and can be taxed as either a corporation or partnership depending on how it’s set up, whereas an S Corp is always taxed as a corporation. This article discusses the similarities and differences between these two forms of organization so that you can decide which is best for your business.
Features, Benefits, and Drawbacks
Each of these structures has their own set of features, benefits, and drawbacks.
- LLC: This type of entity has pass-through taxation. A limited liability company (LLC) is a business structure that provides its owners with the tax advantages of being a corporation while still allowing flexibility in how profits are distributed. The LLC is also more flexible than an S Corporation because it can have multiple members and there are fewer restrictions on ownership. However, some limitations may apply regarding management positions in the company if it's taxed as an S corporation instead of being treated as one entity on its own return (i.e., if you're self-employed).
- S Corporation: An S corporation allows for pass-through taxation; however, there are several restrictions involved: No more than 100 shareholders can be allowed within the same group; only US citizens or qualified aliens may hold shares; no more than 75% foreign persons or entities are permitted to own stock; no publicly traded companies or banks may form or become shareholders; individual stockholders cannot become officers unless they started out at least 2 years prior to incorporation date; any profits left over after paying shareholder dividends must go back into company operations through certain investments before paying out another dividend again next year."
Needs and Preferences
When deciding between a LLC and an S Corp, it's important to consider the needs and preferences of the business owner or owners. If you’re a business owner who wishes to maintain a high level of personal control over your company, then an LLC is likely the better option. An S Corp allows you to retain more personal assets if the business fails because there's no liability protection between shareholders and their company.
Similarities
LLCs and S Corps share certain characteristics such as liability protection. LLCs are considered pass-through entities, which means that they are not taxed at the corporate level, but rather their income is passed through directly to their owners who on their personal tax returns then report the income.
Both LLCs and S Corps are limited liability entities (LLCs being a hybrid of both). This means that all of the owners/shareholders are protected from any legal liabilities associated with running the business if something goes wrong. For example, if you were to get sued for something your company did wrong, you would only be responsible for paying out what was in your personal bank account—not necessarily all of the money in your company’s bank account.
In addition to this protection against legal liability, both LLCs and S Corps have similar tax treatment: they can choose to be taxed as either a sole proprietorship or partnership unless they elect not to file taxes under one of those two options on Form 8832 (or submit an election statement). Unlike sole proprietorships or partnerships though, LLC's also have limited liability status which further protects them against lawsuits regarding personal claims against them while still giving them some tax benefits like depreciation deductions or credits available through other types of businesses like corporations.
Conclusion
While LLCs and S Corps share many of the same features, there are also some differences between the two types of business entities. The most important thing is to understand the benefits and drawbacks of each structure before deciding which one is right for your business. When comparing an S Corp vs LLC, it's important to keep in mind that neither one is necessarily better than another.
