LLC Vs S Corporation Definition, Differences, Importance, And More

LLC Vs S Corporation: Definition, Differences, Importance, And More

Startups 5 Mins Read January 17, 2024 Posted by Soumava Goswami

LLC Vs S Corporation: What are the differences? – When you are starting a business, you can choose which type of business you want to run. Both LLCs (limited liability companies) and S corporations are popular among business owners. However, these two types of businesses are different when it comes to management structure and taxation procedure. In some cases, a business can be both an LLC and an S Corp at the same time.

In this article, you will learn about LLCs and S Corporations in general. Firstly, we will discuss the general aspects of both these business structures. Here, we will define and discuss the major features. Finally, we will share with you the major differences between both of these business structures. Hence, to learn more about them, read on through to the end of the article.

LLC Vs S Corporation: A General Overview

You might have heard both the terms LLCs and S Corporations together. While an LLC is a legal business structure, an S Corporation is a business structure based on tax classification. Hence, even as an LLC, you can choose your business to be taxed as an S Corp. under certain conditions. In fact, a lot of companies choose this combination to avail of tax advantages.

However, as a business owner, you will need to understand the way in which the advantages apply. Since business entities and tax structures are complicated, it will be beneficial for you to understand them and save both your time and money.

What Is An LLC?

According to Investopedia,

?An LLC is a limited liability company, which is a type of legal entity that can be used when forming a business that offers protection to the owner(s) from personal liability for debts and other obligations that a business might incur. In other words, the personal assets of the owner cannot be used for legal claims against the business.?

To make your business an LLC, you will need to file articles of organization with the secretary of the state. LLCs are popular since the structure allows the company to become similar to a corporation. However, LLCs, in comparison, are easy to establish. This is because there are fewer regulatory requirements as compared to other types of corporations.

Firstly, an LLC provides the business owner with personal protection. This means that in case of the failure of the business, creditors cannot go after the personal assets of the business owner. Furthermore, an LLC also allows the business owners to pass through the taxation procedure. This means the income or losses of the business are recorded on the personal tax return of the owner.

You can think of the LLC as a hybrid business structure between a corporation and a partnership. Because of its flexibility and simplicity, this business structure is common among small and medium-sized businesses and entrepreneurs. Furthermore, it also ensures a flexible management system and profit-sharing options as compared to a corporation business.

What Is An S Corporation?

According to Business News Daily,

?An S corporation, also called an S corp or an S subchapter, is a tax election that lets the IRS know your business should be taxed as a partnership. It also prevents your business from incurring corporate-level double taxation. To become an S corp, your business must first register as a C corporation or an LLC.?

The owners of a business are called shareholders in an S Corporation. Despite you being the owner, the business will consider you an employee of the organization. Hence, you need to pay yourself a reasonable salary. Furthermore, the losses, profits, deductions, and credits are taxed at the level of the shareholder.

If you want to qualify as an S Corporation for your business, your business needs to have a shareholder number between one and a hundred. However, to become an S Corp in the United States, your business needs to be located in the US. Also, you will need to file with the IRS (Internal Revenue Service) as an American Corporation.

You have to understand that an S Corporation is not a business entity. It is just a tax classification for a business. Whether it is an LLC or a corporation, it is eligible for taxation as an S Corporation under certain conditions. Like a C Corporation, an S Corporation does not pay corporate income tax. Instead, the profits of the company pass through the personal tax returns of the business owner(s).

LLC Vs S Corporation: What Are The Major Differences?

According to the Forbes Advisor,

?Some LLC owners save money on self-employment taxes by electing S-corp taxation. This is because, as an S-corp owner, you don?t have to be self-employed?you can become an employee of the company and pay yourself through regular payroll. Your salary will still be subject to Medicare and Social Security taxes, but any company profits over and above your salary will not.?

In an LLC, the members of the business need to pay their employment taxes as well as Social Security and Medicare taxes directly to the IRS. However, in an S Corp, the shareholders of the company get a salary from the business, and the business pays their payroll taxes. The directors deduct these taxes as business expenses from the taxable income of the company.

However, if there are leftover profits for the business, the shareholders get them as dividends. These dividends have a lower tax rate as compared to the regular income. Also, when it comes to the structure of the business, an S Corporation cannot have more than a hundred shareholders. However, an LLC can have unlimited members.

Wrapping Up

LLC vs S Corporation ? Hope this article was helpful for you in understanding the differences between these two types of businesses. Although LLCs are easier to set up and maintain, S Corporations are preferable for businesses that look for outside financing. However, it is still important for you to consult a corporate lawyer before you alter the structure of your business.

Do you have more information to add on LLCs and S Corporations? Consider sharing your information with us in the comments section below.

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A passionate writer and an avid reader, Soumava is academically inclined and loves writing on topics requiring deep research. Having 3+ years of experience, Soumava also loves writing blogs in other domains, including digital marketing, business, technology, travel, and sports.

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