If you’re starting a business or are thinking of revising your organization’s structure, you might be wondering whether you should start an LLC or form an S corporation. There are a few similarities between the two, but that doesn’t mean that you don’t need to give careful thought to which one you choose. Forming an LLC or an S corporation is a big decision that can impact your foreseeable future. Below, we’ll take a look at the benefits of an LLC vs. an S corp and what you need to know when you decide to form a corporation of either type.
What LLCs and S Corporations Have In Common
Regardless of which type of corporation you choose, your business will have:
- Limited liability protection
- Separate entities
- Ongoing state regulations (like fees and annual reports)
- Pass-through taxation (S corps have to file a business tax return; LLCs do only if they have more than one owner)
Ownership and Management Differences
When you create an LLC, you’re allowed to have an unlimited number of owners (also referred to as members). LLCs can also have members who are non-U.S. citizens/residents. LLCs can be owned by other types of corporations (including S corporations, C corporations, partnerships, and other LLCs). They are also allowed to have unrestricted subsidiaries. Owners or managers can run daily operations; in this way, an LLC can be run either like a partnership or a corporation.
S corps are far more restricted. They can have no more than 100 shareholders/owners, cannot have non-U.S. citizens/residents as members, and cannot be owned by other corporations. Unlike LLCs, S corps have officers and directors. A board of directors will oversee the corporate affairs and manage major decisions, while officers run daily operations.
While it’s recommended that LLCs follow some of the same internal formalities as S corporations do, they aren’t legally required to do so. S corporations have to adopt bylaws, issue stock, keep meeting minutes, and hold director and shareholder meetings. It’s recommended that LLCs adopt an operating agreement, document major company decisions, issue membership shares, and hold and document member meetings — but again, they don’t have to do these.
One of the benefits of an LLC is that they’re great for short term projects. In many states, LLCs have to list a dissolution date when they file official documents. The drawback of this is that these corporations don’t last forever and can automatically dissolve if a member withdraws or dies. S corporations, on the other hand, are perpetual and have stock that can easily be transferred. That’s not the case with LLCs.
For many businesses, the benefits of an LLC formation far outweigh the drawbacks. But an S corporation filing may be much more appropriate in certain cases. If you want to find out more about how to create an LLC or what type of designation is better for your specific circumstances, contact a business filing service.