LLCs(Limited Liability Corporations) and S-Corporations are popular business entities and at the small business level they are the favorites. They are both known as flow-through entities meaning that the net results of the business flows through to the personal tax returns of the owners. Both entities offer liability protection to the business owners if the entities are structured and operated profitably. However, there are many differences between the two entities and it is a question that has come up a few times recently for clients or prospective clients of Franklin Management. Below are the highlights of the differences.
An LLC is sometimes referred to as “corporation lite.” It has all of the protection of a corporation but is easier to set up and operate. Tastes great, less filling.
An S- Corporation follows the same record keeping rules and procedures of a C Corporation. Technically, there needs to be a board of directors with an annual meeting and minutes of the meeting must be taken and recorded. That is what the law states. In practical terms very few small S-Corporations do all of this. However if there are multiple owners that are not related it makes sense to follow these rules.
The S- Corporation is the smaller version of a C-Corporation used by small companies. It is also sometimes referred to as a personal corporation. The C Corporation is the standard corporation. It is the entity that is used by major companies such as those on the stock exchanges.
Following are some other issues to compare these two entities on:
Payroll-An S Corporation requires a payroll for owners and officers of the corporation. This comes with payroll tax filings, year end w-2s, the works. An LLC compensates owners through “guaranteed payments.” Somewhat like paying a contractor the LLC will pay an owner for services rendered with no taxes withheld. It then becomes the responsibility of the owner to pay his income tax.
Ownership-An s-corporation can have up to 75 owners, however none can be non-resident aliens. No such restrictions for an LLC.
Flexibility in profit sharing-An S-Corporation needs to share profits(distributions)based on ownership percentages. An LLC can decide to share profits as it see fit. For instance if a 10% owner of an LLC is doing 90% of the work they are eligible to take 90% of the profits.
Employment Tax-This is the one big advantage an S Corporation has. The profits in an S-Corporation will show up on a form K-1(think of this as a w-2 for a business) and will only be subject to income tax. The profits of an LLC also show up on a form K-1 also and are subject to both income tax and self-employment tax, roughly 15.3%.
LLC or S-Corporation, aisle seat or window, draught or bottle. Sometimes it comes down to personal preference.