What is the difference between an S-Corporation and an LLC?

What is the difference between an S-Corporation and an LLC?

 

The primary differences between an S-Corporation and an LLC is ownership structure and taxation.

As a legal entity that’s separate from its owners, corporations can make a profit, be taxed, and can be held legally liable. Corporate ownership is determined by shares issued to individual “share-holders” where each share represents a “unit” of ownership in that entity. The value of each “unit”, or share, is determined by several factors, including the number of shares issued. The organizational structure of a corporation can vary, but the typical organizational structure consists of a board of directors, officers, employees, and shareholders.

The LLC is not actually a corporation, but is rather a business organization that can be comprised of one or more owners. With the LLC (Limited Liability Company) owners are called “Members” and can own a specified % of the business rather than holding shares in the company. LLCs do offer more flexibility in the way they are managed and usually have fewer recordkeeping and reporting obligations than corporations.

LLC business owners have the option of taxing the LLC like a sole proprietorship, a partnership or a corporation by filing the appropriate forms with the IRS. Generally, the LLC’s business income is treated like personal income because the IRS automatically classifies the LLC as either a sole proprietorship or a partnership depending on how many members are involved. The organizational structure of an LLC is more streamlined and informal than that of a corporation, however, an LLC is required to have at least one registered manager (or Managing Member).

The LLC also has flexibility with respect to taxation. An LLC that elects to be taxed as a corporation can pay its members a salary that work in the business as they are considered employees. This means having to withhold income tax and pay a part of payroll taxes such as social security and Medicare.

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