Similarities and Differences Between LLCs and S Corporations
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Similarities
1. Both are separate legal entities that are created by a state filing.
2. They offer the same limited liability protection, the owners are typically not personally responsible for the debts and liabilities of the business.
3. Both are pass-through tax entities – this means that the income or loss generated by the business is reflected on the personal tax return of the owners.
Differences
1. Ownership Restrictions imposed by the IRS:
- The C corporation can have an unlimited number of shareholders while a subchapter S corporation is restricted to no more than 100 shareholders.
- Non-US residents can be owners of a C corporation while an S corporation may not have Non-US residents as shareholders.
- Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs or partnerships.
2. LLCs are allowed to have subsidiaries without restriction.
3. Formalities:
- A corporation requires formalities, annual meetings of shareholders and directors are required each year and meeting minutes are required to be kept with the corporation’s records.
- LLCs are not required to hold such meetings; however, it is a good idea to document major decisions of the company.
4. A corporation’s existence is perpetual. Conversely, an LLC typically has a limited life span. Most states require that an LLC list a dissolution date in its articles of organization or certificate of organization and certain events such as the death or withdrawal of a member can cause the LLC to dissolve.
5. The stock of an S corporation is freely transferable while the interest (ownership) of an LLC is not – typically the approval of the other members must be received.
6. An S corporation may have advantages with self-employment taxes in comparison with an LLC. For more information on this issue, please contact your tax advisor.
Management
The management of an LLC can be by members, in which case the management is much like that of a partnership. If the management of an LLC is by managers, then the management structure closely resembles a corporation.
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