When starting a business, choosing the right business structure is critical to its success. Two popular options are Limited Liability Companies (LLCs) and S Corporations (S Corps).
Both types of businesses offer liability protection and pass-through taxation. But there are differences in ownership restrictions, management structure, and stock issuance.
In this article, we’ll provide a simple and easy-to-read guide. This is to help you understand the differences between LLCs and S Corps, so you can make an informed decision for your business. Read on!
What is an LLC?
Limited Liability Company (LLC) is a flexible and easy-to-set-up new business structure. It combines the benefits of a partnership and a corporation. LLCs are not taxed as separate entities. Instead, the profits and losses “pass through” the business to the owners’ personal tax returns.
LLCs provide liability protection and offers flexibility in management. They have fewer regulations than corporations. LLC is also beneficial for businesses with multiple owners. They allow owners to split profits and losses according to their ownership percentage.
Nav LLC Formation is a great resource for entrepreneurs who are looking to form an LLC. They provide affordable LLC formation services, registered agent services, and other business services. This helps entrepreneurs get their businesses up and running quickly.
What is an S Corporation?a
S Corporation (S Corp) is a pass-through entity. This means that profits and losses pass through the business to the owners’ personal tax returns. S Corps has restrictions on who can be shareholders, the number of shareholders, and the types of stock that can be issued.
S Corp is beneficial for small businesses. They provide liability protection and have pass-through taxation. S Corps are also beneficial for businesses that want to offer their employees a share of ownership.
LLC vs. S Corp: Key Differences
Ownership Restrictions
LLCs can have an unlimited number of owners, while S Corps are restricted to no more than 100 shareholders. Additionally, S Corps cannot have non-U.S. citizen shareholders or shareholders who are corporations or LLCs.
Taxation
LLCs have pass-through taxation, which means that profits and losses are passed through to the owners personal tax returns. S Corps also have pass-through taxation, but must file an annual tax return, Form 1120S, and issue K-1s to each shareholder.
LLCs are taxed on their entire net income, while S Corps are only taxed on income that is not distributed as dividends to shareholders.
Management Structure
LLC has a flexible management structure, with either member-managed or manager-managed options. S Corps have a more formal management structure, with a board of directors and officers.
Stock Issuance
LLCs do not issue stock, while S Corps issues limited types of stock. S Corps must issue only one class of stock, and that stock must have equal voting rights and dividend rights.
Know the Right Types of Businesses for You Today
Choosing the right business structure for your company is a crucial decision that can affect its success in the long run. Limited Liability Companies (LLCs) and S Corporations (S Corps) offer many benefits and drawbacks.
Both types of businesses have unique characteristics that cater to different business needs. Understanding the differences between LLCs and S Corps can help you make an informed decision about which structure is right for you.
Did you find this article helpful? Visit more of our blogs!
