S Corp vs LLC - The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.
Advantages
Owners have limited personal liability for business debts even if they participate in management
Profit and loss can be allocated differently than ownership interests
IRS rules now allow Limited Liability Corporation (LLC) to choose between being taxed as partnership or corporation
Disadvantages
More expensive to create than partnership or sole proprietorship
State laws for creating Limited Liability Corporation (LLC) may not reflect latest federal tax changes
S Corporation: To qualify, generally, the corporation must have a maximum of 75 shareholders who are individuals. Once a corporation makes the Subchapter S election to be an S-Corporation, profits and losses are passed through the corporation and are reported on the individual tax returns of the respective shareholders of the S-Corporation.
This is the same basic "pass-through" treatment afforded partnerships and LLCs. The key distinction of the S-Corporation is that profits and losses are not taxed at the corporate/business level like they would be if the corporation remained as a C Corporation.
S Corp vs LLC: Advantages and Disadvantages
An LLC is not a separate tax entity like a corporation; it is what the IRS calls a pass through entity, like a partnership or sole proprietorship. All of the profits and losses of the LLC pass through the business to the LLC owners , who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states do charge the LLC itself a tax.
Corporate Formalities
S Corp vs LLC: Advantages and Disadvantages
An S-Corporation follows the same state formalities as does a C-corporation. However, an S-Corporation must make a special tax election under sub-chapter S of the Internal Revenue Code by filing IRS Form 2553.
The S-Corporation must complete and file IRS Form 1120s to report its annual income to the IRS each year.
General Shareholder Requirements
ALL shareholders of the corporation must be U.S. Citizens or have U.S. Residency Status. If, for any reason, shares are somehow sold or transferred to a shareholder who is a foreign national, the corporation will lose its S-Corporation status and be treated as a C-Corporation.
Losing S-Corporation Status
An S-Corporation that loses its status as such may not re-elect S-Corporation status for a minimum of five years.
Who should elect S-Corporation Status
Owners who want the limited liability of a corporation and the "pass-through" tax-treatment of a partnership will often make the S-Corporation election.
