LLC vs S-Corp
Start your companyWhat is the difference between an LLC and a S-Corporation?
LLCs and S-Corps both provide liability protection to owners. However, LLCs do not have the formal corporate requirements of S-Corps. Both LLCs and S-Corps are taxed as pass-through entities. This means that LLCs and S-Corps do not pay taxes on business profits but instead pass profits onto their owners to report on their personal income tax returns.
LLCs and S-Corps both provide liability protection to owners. However, LLCs do not have the formal corporate requirements of S-Corps. Both LLCs and S-Corps are taxed as pass-through entities. This means that LLCs and S-Corps do not pay taxes on business profits but instead pass profits onto their owners to report on their personal income tax returns.
Benefits of LLC vs. S-Corp
LLCs are the best entity type for companies with owners who seek:
Pass-through taxation by default
Flexible management structure
Ability to elect C-Corp and S-Corp taxation
No required formalities
Benefits of S-Corp vs LLC
S-Corps are the best entity type for companies with owners who seek:
Pass-through taxation
Employee equity incentives
Business credibility
Strict corporate formalities
LLC Advantages
Liability protection
Tax advantages
Simplicity
Tax planning options
Flexibility
Business loans
S-Corp Advantages
Liability protection
Tax advantages
Employee equity incentives
Tax planning options
Public perception
Business loans
LLCs are the right entity for:
E-commerce & online businesses
The favorable tax options and easy upkeep of an LLC make it an attractive option for anyone wishing to operate an e-commerce or other online business in the US. Unlike S-Corps, LLCs do not have extensive formal requirements, such as annual shareholder meetings and boards of directors. As such, LLCs simplify company management and provide additional time to devote to your business, something you should keep in mind when deciding between S-Corp vs. LLC.
Startup companies with few owners
An LLC offers the right combination of personal liability protection, pass through taxation, and business credibility desired by most startup businesses. Small business owners can use an LLC to gain access to business loans to scale their companies, an additional factor you should keep in mind when choosing between S-Corp vs. LLC.
Service businesses including SaaS
Service-based business owners need liability protection to shield themselves from claims against the business by disgruntled customers. An LLC not only provides liability protection but also offers the ability to change the company’s taxation method to fit business needs.
S-Corps are the right entity for:
Companies owned by US residents
Only US citizens and residents owners can elect to be taxed as an S-Corp. For these individuals, an S-Corp offers many advantages, including pass-through taxation and savings on self-employment taxes. In addition, since S-Corps are corporations, they can issue stock and stock options to incentivize employee performance, an important factor when choosing between LLC vs S-Corp.
Businesses with US Employees
If your business requires employing US residents, an S-Corp can provide you with both tax savings and employee performance incentives. By adding the owners to the existing payroll for other employees, the owners can save on self-employment taxes levied on dividends. Also, an S-Corp can issue employee incentives in the form of stock or stock options in the company.
Bootstrapped Startups
Unless you are raising money from investors, who generally prefer C-Corps, an S-Corp will provide you with all advantages of a corporation, including liability protection, public perception and ability to issue stock and stock options to employees, without the need to pay additional corporate income taxes.
LLC
Pros
Liability protection > An LLC shields your personal assets from your company’s debts and legal liabilities.
Simplicity > An LLC offers simplified maintenance requirements providing liability protection without the need for annual meetings, boards of directors, or officers.
Tax advantages > LLCs do not pay corporate income taxes. Instead, profits from an LLC are passed through to the owners directly, thereby reducing your tax liability. You should consider the LLC vs S-Corp tax advantages when deciding between the two.
Tax planning options > By allowing owners to elect to be taxed as an S-Corp, S-Corp, or pass-through entity, LLCs provide the most tax flexibility of all entity types. This is why it’s important to evaluate LLC vs S-Corp taxes for your company before deciding on the best entity type.
Flexibility > An LLC can have one or more owners and can be managed by its owners or an appointed manager allowing you to tailor company management to your needs.
Business loans > An LLC allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “LLC” at the end, it lets customers and partners know you are a credible business.
Cons
Companies with many owners > Companies with many shareholders will be hindered by flexible management structure and minimal formal requirements of LLCs.
Raising capital > LLCs are not the right entity type for raising capital because investors do not favor the pass-through taxation and flexible structure of LLCs.
S-Corp
Pros
Liability protection > An S-Corp shields your personal assets from your company’s debts and legal liabilities.
Public perception > Most well-known companies are corporations. Owning an S-Corp tells the public that you are serious about scaling your business.
Employee equity incentives > S-Corps allow their owners to issue stock and stock options to their employees without the double taxation of C-Corps, which is one of the main benefits of S-Corp vs LLC
Tax planning options > Owners of an S-Corp can elect C-Corp corporate taxation which provides flexibility in tax planning and optimization.
Tax advantages > S-Corps do not pay corporate income taxes and can help shareholders save on self-employment taxes. It is important to consider your S-Corp vs LLC taxes when deciding on the best entity type for you.
Business loans > An S-Corp allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “Inc.” at the end, it lets customers and partners know you are a credible business, another one of the benefits of S-Corp vs LLC.
Cons
Only for US residents > All owners of an S-Corp must be US residents or US citizens. If a single owner is a foreign resident, you cannot make an S-Corp election.
Strict formalities > S-Corps are required to hold annual meetings, keep formal minutes of meetings, appoint a board of directors, and select officers.