S Corp vs LLC: Key Differences You Should Know 

If you’re starting a new business, two of the most common legal structures you’ll likely consider are S corporations and LLCs. Both offer some key advantages – but also have important differences you need to factor in.

So how do you choose between an S corp vs LLC?

In this article, we’ll compare and contrast LLCs and S corps across all the key factors to consider including:

  • Formation requirements
  • Ownership structure
  • Management and operations
  • Tax treatment
  • Record keeping and accounting
  • Raising capital and attracting investors

We’ll also discuss scenarios where one business structure may be better suited versus the other.

With the right information, you can make an informed decision on whether an S corp or LLC is your best option when forming a business entity.

What are S Corps and LLCs?

Before diving into the details, let’s quickly define these business structures:

S Corporations are formal corporations that elect a special tax status with the IRS. They have shareholders, bylaws, and board structures.

LLCs are more informal business entities that combine aspects of partnerships and corporations. LLCs have members instead of shareholders.

Now that we’ve defined the entities, here are the key differences and similarities to be aware of:

Forming an S Corp vs LLC

The first difference is in how each structure is formed.

Creating an S Corporation

To form an S corporation, you must file articles of incorporation with your state, along with bylaws that outline operating procedures.

S corps require:

  • Board of directors
  • Shareholder meetings and votes
  • Corporate officers (President, Secretary, Treasurer)
  • Issuance of stock shares

The formalities involved mean forming an S corp takes more time and paperwork compared to an LLC.

Starting an LLC

To create an LLC, you only need to prepare and file articles of organization with your state.

LLCs do not require:

  • Formalities like board of directors
  • Shareholder meetings
  • Issuing stock shares

LLC formation is generally simpler with fewer compliance requirements.

Both structures require registering a business name and obtaining licenses. Overall, it is quicker and easier to set up an LLC.

Ownership Structure

Ownership structure is another key difference.

S Corp Shareholder Ownership

S corps issue shares of stock to shareholders. Ownership is determined by stock holdings.

  • Can have up to 100 shareholders.
  • Shareholders can be individuals, entities or trusts.
  • Ownership is easily transferable through buying/selling of shares.

LLC Member Ownership

LLCs do not issue stock. Ownership is through membership interests:

  • No limits on number of members.
  • Allows individuals, companies, trusts or foreign investors.
  • Membership interests less easily transferable.

S corps allow share-based ownership while LLCs offer membership-based ownership.

How S Corps and LLCs are Managed

Decision-making and management processes also differ quite a bit between these entities.

S Corp Management

S corps have more structured management requirements including:

  • Shareholder meetings and votes
  • Appointed corporate officers
  • Important company decisions require shareholder approval
  • Detailed record keeping and documentation

LLC Management

LLC management is more flexible.

  • No required member meetings
  • No officers or directors
  • Management structure specified in operating agreement
  • Less formalities and compliance

LLCs allow greater latitude in governing the business compared to S corps.

Tax Treatment

Tax treatment is a major factor in choosing a business structure.

S Corp Taxation

S corps avoid double taxation of income:

  • Profits/losses pass through to shareholders
  • Shareholders pay taxes on their share of income
  • Salaries paid to shareholders are taxed like payroll

LLC Taxation

LLCs also avoid double taxation but have more flexibility:

  • Profits/losses passed to members
  • Members pay taxes on their share of income
  • No payroll tax requirements

Accounting and Compliance Differences

S corps and LLCs also differ in accounting, compliance and operational factors.

S Corp Requirements

S corps have stricter rules including:

  • Required shareholder meetings with minutes
  • Issuing share certificates
  • Only one class of stock allowed
  • Must use calendar year for tax filing
  • Salaries paid to officers

LLC Requirements

LLC rules are more flexible:

  • No required member meetings
  • No stock issuance
  • Allows different membership classes
  • Can choose tax year-end date
  • No salary requirements

LLCs involve less paperwork and corporate formalities.

Raising Capital for S Corps vs LLCs

Access to capital is crucial for new businesses. This is impacted by your legal structure.

S Corp Capital Raising

S corps allow:

  • Issuing stock shares
  • Up to 100 shareholders
  • Shareholders invest and get ownership

LLC Capital Raising

LLCs are more limited:

  • No stock issuance
  • Unlimited members but contributions not tied to ownership

S corps can more easily attract investors through issuance of shares.

Key Similarities Between S Corps and LLCs

Despite the differences outlined, S Corps and LLCs do share some common traits:

  • Limited liability protection for owners
  • Pass-through taxation (no double taxation)
  • Less IRS paperwork than C corps
  • Owners pay taxes through individual returns

Should I Choose an S Corp or LLC?

So which structure is right for your small business? Here are some key factors to consider:

Choose an S corp if you want:

  • Formal corporate structure
  • Share-based investor capital
  • Board oversight
  • Defined management roles

Choose an LLC if you want:

  • Greater flexibility and informality
  • Member-based contributions
  • Custom management structure
  • Less operational paperwork

Summary: Key Differences Between S Corps and LLCs

  • S corps have more complex formation requirements
  • LLCs are easier and faster to set up
  • S corps have share-based ownership, LLCs have membership interests
  • LLCs allow greater flexibility in operations and management
  • S corps require more administrative formalities
  • LLCs offer more tax filing flexibility
  • S corps can more easily attract investors through stock shares

Summing Up

As you can see, S corporations have more requirements compared to the flexibility of LLCs. But S corps offer formal ownership through stocks.

For most small businesses, LLCs are simpler to set up and administer. But evaluate based on your specific needs.

Just be sure to make an informed choice on legal structure early on. Both S corps and LLCs have their advantages and disadvantages to consider.

Hopefully this detailed comparison helps shed light on the pros and cons of LLCs and S corps. Analyze the factors carefully before deciding upon the ideal structure for your business.