The Differences Between LLCs and S Corporations

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jun 19, 2018

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While an S corporation and a limited liability company (LLC) are similar in many ways, there are some key differences to consider before deciding which structure to use for your business. If tax-free employee benefits like healthcare premiums are very important to you, you may want to consider either using a C corporation structure as your business entity, or electing to tax your LLC as a C corporation. The following provides a general overview of the similarities and differences between these business structures.

LLC vs S Corporation

Both a limited liability corporation and an S corporation have the benefit of pass-through taxation, which means that the dividends of the business IS considered to be the personal income of the owners, and are taxed as such. This is unlike a C corporation, in which the corporate dividends are subject to both corporate taxation and personal income taxation, otherwise known as double taxation.

The S corporation and the LLC also offer the same limited liability protection, and business losses may be deducted from personal income taxes. Because an S corporation and an LLC are not taxed as entities, but instead as the owners’ personal income, the business may not pay for health insurance premiums the same way that a C corporation would. Only if the partners of the LLC choose to be taxed like a C corporation can the health insurance premiums be written off  the taxable income of the entity. Under this option, the owners of the corporation will not be personally taxed for this benefit. While you may use the profits of the S corporation or the LLC to pay for health insurance, this money will still be taxed with the rest of your personal income.

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Additional Differences between an LLC and an S Corporation

There are additional differences between the S corporation and the LLC. If you desire a more structured business entity with corresponding formalities, then you should choose an S corporation. An S corporation must hold annual stockholder meetings as well as periodic meetings for the managers or directors. In contrast, an LLC is not subject to any of these types of formalities. Further, an S corporation may not be owned by a non-resident foreign national, while an LLC may. Finally, while the membership of an S corporation is limited to 100, you may have an unlimited number of partners in an LLC.

For more information, you should contact a tax attorney or business attorney to walk you through the complexities of the LLC and S corporation structures so that you can determine which is right for you.

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