S Corp vs. LLC: What’s the difference and how to choose?

If you have ever started or been involved in the management of a business, you might have heard the terms “S Corp” and “LLC” crop up at some point. 

Both are types of business structures in the US; however, there are some key differences to be aware of.

Many like to bring up the “S Corp vs. LLC” argument. In truth, they should not be pitted against each other as they each have their unique benefits.  

While an S Corp allows for pass-through taxation according to a rigid set of rules and requirements, an LLC is a flexible structure that gives owners more reign to conduct the business how they wish. 

To help you figure out which is right for you, this guide will cover:

• What an S Corp is
• What an LLC is 
• The differences between an S Corp and an LLC
• The advantages and disadvantages between the two
• Frequently asked questions on the matter.

Key Takeaways

• An S Corporation is a structure for a business that allows for revenue and losses to “pass-through” to the owner’s personal taxes — thus avoiding “double” corporate taxes.
• An LLC is a different structure that removes any personal liability from a business, meaning the owner’s assets are not vulnerable should someone bring legal action against the company.
• Each has its advantages and disadvantages, with the most important being that an LLC is flexible and easy to set up. However, an S Corp offers better taxation benefits.
• Smaller businesses will likely benefit from an LLC, while more complex companies are likely better off choosing to become an S Corp.

S Corporation

“S Corporation” is a term that frequently pops up in the business world, but do you know what it actually means? 

An S Corporation (also known as an “S Corp”) is a corporation structure that allows you to be free of the double taxation that C Corps and other business structures are subject to. 

This means losses, revenue, and profits can pass through to the owner’s personal income, subsequently escaping corporate taxes and allowing you to keep more of your hard-earned cash. 

There are strict criteria that your business must meet to become an S Corp, and you must file with the IRS to receive this status. 

However, if you do meet the requirements, it is a smart business move that can prove to be very advantageous in the long run.

Limited Liability Company (LLC)

An LLC (also known as a Limited Liability Corporation) is another type of business structure that allows for personal liability protection. 

This means that upon forming an LLC, the owner’s personal assets are protected and cannot be targeted by creditors or anyone else seeking to make a legal claim against the company. 

Essentially, there is no personal liability for the owner for any issues or debts that may occur within the business. 

Additionally, an LLC allows for pass-through taxation, which means that revenue and profits pass through to the owner’s tax return. 

An LLC is a popular choice for many business owners as there are not many requirements that must be met to file.

What’s the difference between an S Corp and an LLC?

Criteria	S Corp	LLC
Ownership	An S Corporation is limited to 100 owners, none of whom may be non-US Citizens or Residents. Additionally, it may not be owned by a corporate entity	An LLC can have as many or as few owners as possible. Owners do not have to be U.S. citizens
Formation	To form an S Corp, a strict process must be followed and you must meet all of the government requirements. The key document is Form 2553, which creates S Corp status for the company	To form an LLC, Form 8832 will need to be filed in order to express the election of this business structure
Management	An S Corp is required to have a CEO, CFO, and a board of directors to oversee and manage day-to-day operations	Unlike S Corps, there is no required management structure within an LLC
Business Operations	A rigid internal structure is required for an S Corp, including required shareholder meetings from which detailed minutes must be kept	LLCs do not have any strict legal requirements when it comes to operations. While they are strongly urged to adopt an LLC operating agreement, there is no legal requirement for them to do so

Advantages & Disadvantages

Here are some of the key advantages and disadvantages of an LLC and an S Corp.

LLC

S Corp

How to choose between an LLC and an S Corp

Even though you now know the differences, advantages, and disadvantages of an S Corp and an LLC, you may still be wondering how to choose the correct option for you. 

You are right in thinking that there is a lot of overlap between the two; however, here are some general guidelines to help you make an informed decision based on your needs.

If you are a small business (perhaps as a sole owner or with one or two other partners), an LLC may be the right option for you. 

This type of structure is flexible and does not have a long list of requirements that you need to meet.

Additionally, you are protected from personal liability and will be able to avoid double taxation on your revenue. 

On the other hand, if you are a larger, more complex business, you may benefit more from registering as an S Corp. 

The rigid guidelines will allow your business to become optimally structured, and the pass-through taxation system will greatly benefit all shareholders.

S Corp vs. LLC: Which option is best for you?

Congratulations – you now know the difference between an S Corp and an LLC!

You are now armed with the knowledge you need to make the right decision for you and your business.

Remember: there is no one-size-fits-all approach to choosing a business entity.

You need to keep your specific company in mind, as well as your goals, personal ethos, and desired operating vision to make the best decision possible. 

FAQs