Comparison Of Llc Corporation And S Corporation Chart
When you are considering starting a business or changing the legal structure of your existing business, two popular options are LLC and S Corporation. Both offer limited liability protection, but they have different tax structures and requirements. This article will compare LLC Corporation and S Corporation in detail and help you choose the best option for your business.
What is LLC Corporation?
LLC stands for Limited Liability Company. It is a flexible business structure that combines the liability protection of a corporation with the tax benefits of a partnership or sole proprietorship. LLC owners are called members, and they have limited personal liability for the company's debts and obligations.
LLC Corporation does not pay taxes on its income, but the profits and losses are passed through to the members, who report it on their individual tax returns. This is called "pass-through" taxation. LLC Corporation requires less paperwork and formalities than a corporation, making it an attractive option for small businesses.
What is S Corporation?
S Corporation is a tax status, not a legal structure. It is a regular corporation that has elected to be taxed as an S Corporation under the Internal Revenue Code. S Corporation has limited liability protection, and its owners are called shareholders.
S Corporation also has "pass-through" taxation, meaning that the profits and losses are passed through to the shareholders, who report it on their individual tax returns. However, S Corporation has more restrictions than LLC Corporation. For example, it can have no more than 100 shareholders, and they must be U.S. citizens or residents.
Comparison of LLC Corporation and S Corporation Chart
The following chart summarizes the differences between LLC Corporation and S Corporation:
Advantages of LLC Corporation
LLC Corporation has several advantages over S Corporation:
- Flexible management structure: LLC Corporation can be managed by its members or by a designated manager.
- No restrictions on ownership: LLC Corporation can have an unlimited number of members, and they can be individuals, corporations, or other entities.
- No residency or citizenship requirements: LLC Corporation members can be from any country.
- No restrictions on profit allocation: LLC Corporation can allocate profits and losses in any way agreed upon by the members.
Advantages of S Corporation
S Corporation has some advantages over LLC Corporation:
- Lower self-employment taxes: S Corporation allows shareholders to pay themselves a "reasonable" salary and receive the rest of their income as a distribution, which is not subject to self-employment taxes.
- No double taxation: S Corporation's profits are not taxed at the corporate level, avoiding double taxation.
- More credibility: S Corporation status may give a business more credibility with investors and customers.
Conclusion
Both LLC Corporation and S Corporation offer limited liability protection and "pass-through" taxation. The choice between them depends on your business needs and goals. LLC Corporation may be a better choice for small businesses that value flexibility and simplicity, while S Corporation may be a better choice for businesses that want to save on self-employment taxes and gain more credibility.