Forming your business is one of the most important decisions you will ever make – and the structure you choose can determine a lot. From how you will pay taxes to your liability and growth options, you need to pick the right structure from the start. When comparing an S-Corp to an LLC, you may think that they are very similar. And, while it is true that they share many qualities, they do have distinct differences.
How LLCs and S-Corps are the Same
LLCs and S-Corp structures do have a lot in common, including:
- Limited liability protection – Both structures do not hold owners personally responsible for the liabilities of their company. Instead, the company is responsible for debts and other associated liabilities.
- Separation – LLCs and S-Corps are separate legal entities that are established when you file your structure with the state.
- Taxation is Pass-Through – Both of these are pass-through entities. S-Corps are required to still file tax returns, while LLCs only file business returns if there is more than one owner. Pass-through taxation means that income tax is not paid on the business level; instead, it is paid through the owner’s personal tax return.
- State Requirements – Both entities are required to follow state laws and requirements, including renewing their licensing, paying fees, etc.
Now that you know what makes an LLC and S-Corp similar, it is time to look at the differences.
S-corp owners have more restrictions by the IRS than LLCs, which include:
- LLCs can have as many members as they would like; S-Corps are limited to 100 members maximum.
- A non-U.S. citizen can be a member of an LLC; S-Corps cannot have any non-citizens as members.
- An S-Corp cannot also be owned by a C-Corp; but LLCs don’t have the same ownership restriction.
- LLCs can have subsidiaries.
S-corps have more regulations and formalities that they must follow in order to stay in compliance, while LLCs have a more relaxed approach. These formalities include:
- LLCs – Need an operating agreement, can issue membership shares, must hold annual meetings, and document company decisions.
- S-Corps – Must adopt bylaws, issue out stock to members, hold annual as well as initial meetings complete with minutes and keep those minutes with corporate records.
LLCs are also run like a partnership, while S-corps are run more like businesses with a board and director. When it comes to the self-employment tax, S-Corps do have the advantage over LLCs and S-Corps are easier to transfer ownership of than an LLC.
Which Entity is Right? Hire Business Contract Lawyers in Miami
Picking the right structure is difficult. Business contract lawyers in Miami can help you form your business, draft necessary documents, and ensure you pick the right structure for your business now as well as in the future. Contact the team at Campbell Law Group today for assistance with your business formation.