7 Differences Between LLC and S Corp You Need to Know
If you are starting a business, you may be wondering what is the best legal structure for your company. Should you form a limited liability company (LLC) or a corporation (S corp)? What are the advantages and disadvantages of each option? How do they affect your taxes, liability, and management?
In this article, we will explain the main differences between LLC and S corp, and help you decide which one is right for your business. Here are the key points you need to know:
1. Formation
An LLC is easier and cheaper to form than an S corp. You just need to file articles of organization with your state and pay a filing fee. An S corp requires more paperwork and fees, such as filing articles of incorporation, adopting bylaws, issuing stock certificates, and holding annual meetings.
2. Ownership
An LLC can have unlimited number of owners (called members), who can be individuals, corporations, or other entities. An S corp can have up to 100 shareholders, who must be U.S. citizens or residents. An LLC can also have different classes of membership interests, while an S corp can only have one class of stock.
3. Management
An LLC can be managed by its members or by appointed managers. The members have the flexibility to decide how they want to run their business and distribute profits. An S corp is managed by a board of directors, who are elected by the shareholders. The board appoints officers, such as president, secretary, and treasurer, to handle the day-to-day operations. The shareholders have less control over the business decisions and profit distribution.
4. Liability
Both LLC and S corp offer limited liability protection to their owners. This means that the owners are not personally responsible for the debts and obligations of the business, unless they have personally guaranteed them or committed fraud or negligence. However, an LLC may have more protection from creditors than an S corp, because some states allow creditors to seize the shares of an S corp, but not the membership interests of an LLC.
5. Taxes
Both LLC and S corp are pass-through entities, which means that they do not pay corporate income tax. Instead, the income and losses of the business are passed through to the owners, who report them on their personal tax returns. However, there are some differences in how they are taxed:
- An LLC can choose how it wants to be taxed: as a sole proprietorship, a partnership, a C corporation, or an S corporation. This gives it more flexibility and options to reduce its tax burden.
- An S corp is automatically taxed as an S corporation, which means that it has to follow certain rules and restrictions, such as paying reasonable salaries to its officers and avoiding excessive passive income.
- An LLC may have to pay self-employment taxes on its income, which are 15.3% of the net earnings from self-employment. This includes Social Security and Medicare taxes. An S corp can avoid self-employment taxes by paying salaries to its officers, which are subject to payroll taxes (7.65% for both employer and employee).
- An LLC may have to pay state taxes on its income, depending on the state where it operates. Some states impose a franchise tax or a gross receipts tax on LLCs, which are based on the revenue or the value of the business. An S corp may be exempt from these taxes or pay a lower rate.
6. Benefits
Both LLC and S corp can provide various benefits to their owners and employees, such as health insurance, retirement plans, and education assistance. However, there are some differences in how these benefits are treated for tax purposes:
- An LLC can deduct the cost of the benefits as a business expense, but the owners may have to pay income tax on the value of the benefits they receive, unless they are considered employees of the LLC.
- An S corp can deduct the cost of the benefits as a business expense, and the owners do not have to pay income tax on the value of the benefits they receive, as long as they own at least 2% of the stock of the S corp.
7. Future
Both LLC and S corp can have a long-term future, as long as they comply with the state laws and regulations that govern their existence. However, there are some differences in how they can grow and change over time:
- An LLC can easily change its structure, ownership, or tax status by amending its operating agreement or filing a new form with the IRS.
- An S corp cannot change its structure or tax status without terminating its S election and becoming a C corporation. It can also lose its S status if it fails to meet the requirements for being an S corp, such as having too many shareholders or having non-qualified shareholders.
As you can see, there are many differences between LLC and S corp that you need to consider before choosing one for your business. Each option has its pros and cons, depending on your goals, preferences, and situation. You should consult with a professional accountant or attorney to help you make the best decision for your business.
Difference Between LLC and S Corp: A Statistical Analysis
LLC and S corp are two common business structures that offer different advantages and disadvantages for entrepreneurs. In this blog post, we will compare and contrast these two options based on some key statistical indicators, such as the number of businesses, the average income, the tax rates, and the growth trends.
Number of Businesses
According to the IRS, there were 2.4 million S corporations and 3.8 million LLCs in 2018, the latest year for which data is available. This means that LLCs outnumbered S corporations by 58%. However, both types of businesses have increased steadily over the years, with S corporations growing by 49% and LLCs growing by 259% since 2001.
Average Income
The IRS also provides data on the average income per business for S corporations and LLCs. In 2018, the average income for an S corporation was $81,615, while the average income for an LLC was $50,347. This means that S corporations earned 62% more than LLCs on average. However, this gap has narrowed over time, as LLCs have increased their average income by 113% and S corporations by 76% since 2001.
Tax Rates
One of the main differences between LLCs and S corporations is how they are taxed. LLCs can choose to be taxed as sole proprietorships, partnerships, C corporations, or S corporations, depending on their number of owners and their preferences. S corporations are always taxed as pass-through entities, meaning that their income is taxed only once at the individual level. The effective tax rate for pass-through entities depends on the individual tax brackets of the owners, which can range from 10% to 37% in 2021.
C corporations are taxed twice: once at the corporate level (21% in 2021) and once at the individual level when dividends are distributed (15% to 20% in 2021). Therefore, LLCs that elect to be taxed as C corporations may face a higher tax burden than S corporations or LLCs that elect to be taxed as pass-through entities.
Growth Trends
The choice of business structure may also affect the growth potential of a business. According to a study by the U.S. Small Business Administration (SBA), S corporations tend to grow faster than LLCs in terms of sales, assets, and employment. The study found that S corporations had a median annual sales growth rate of 8.9%, while LLCs had a median annual sales growth rate of 3.6%. Similarly, S corporations had a median annual asset growth rate of 9.4%, while LLCs had a median annual asset growth rate of 4.2%. Moreover, S corporations had a median annual employment growth rate of 4.9%, while LLCs had a median annual employment growth rate of 2%.
LLCs and S corporations are both popular business structures that offer limited liability protection and flexibility for entrepreneurs. However, they also have significant differences in terms of their number, income, tax rates, and growth trends. Depending on their goals and preferences, entrepreneurs may choose one or the other option based on these statistical indicators.
References:
https://www.irs.gov/pub/irs-tege/eotopich00.pdf
https://www.irs.gov/pub/irs-pdf/iss4.pdf
https://www.irs.gov/pub/irs-pdf/f2553.pdf
https://www.irs.gov/statistics/soi-tax-stats-integrated-business-data
https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021
https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
https://www.sba.gov/business-guide/launch-your-business/choose-your-business-structure
https://www.nolo.com/legal-encyclopedia/llc-basics-30163.html
https://www.nolo.com/legal-encyclopedia/s-corporations-basics-30140.html
