LLC vs. S Corp (Full Comparison) – Pros & Cons

Form Your LLC or S Corp Today (Hassle-free & Quick)

When forming a business, one of the biggest and most difficult decisions you are going to have to make is what business structure is best. This could be key to the overall success of your business. S Corps and limited liability companies are often confused, as they are often discussed together, even though they are talking about different aspects of the business. An LLC is a type of business structure, while an S Corp is a tax classification. The two are very different, and there are pros and cons to both, with differences including taxes to management structure. To make things even more confusing, in some cases a business can be both an LLC and an S Corp. This is because you are able to form an LLC and then opt to be taxed as an S Corp, or alternatively, you can just work with the default taxation system of LLCs.

We are going to take a look at the two different structures to help you make that all important decision.

What is an LLC?

An LLC stands for limited liability company, a legal business entity that is a popular choice when it comes to business structure. This type of business is usually used by a sole proprietor or a company that has two or more owners. It can be used for companies of a range of sizes. This type of business structure is best known for protecting the personal assets of the business owner. Therefore, if the business gets into trouble further down the line, it is only the business’s assets that the creditors or plaintiff can go after, not the personal assets of the members. It is a pass-through entity, which means that the members of the company report earnings on their personal tax returns.

This is a popular choice for those that want a more formal business structure in contrast to a sole proprietorship or a partnership. Despite being more formal, it is still very flexible in the way that the business is run and how the profits can be distributed. They are also very flexible when it comes to their tax status.

If an LLC decides to work with the default taxation system for LLCs, then it is taxed in the same way as a sole proprietorship or a partnership. They are taxed differently to corporations, as they allow what is known as pass-through taxation, where the business income or losses will pass through the business and are recorded on the owner’s personal tax return. So, this means that the profits are taxed at the owner’s personal tax rate. If the company has one owner, then it is usually taxed as a sole proprietorship. If it has multiple members, then it would be taxed as a partnership.

When it comes to management structure, the owners of the LLC can choose whether the owners or the managers they have designated actually run the business. If the owners take up the management positions, then the business will run in a similar way that a partnership does.

Pros and Cons of LLC

Pros

  • An LLC has some tax benefits, as they are taxed differently from a traditional corporation.
  • Business operations tend to be much simpler than other corporate structures, and there are minimum requirements to meet. For example, instead of having to follow detailed requirements like an S corporation, they simply have to create and adopt an operating agreement, meaning the business owner can operate whatever way they prefer. A corporation often requires appointed directors, board meetings and a lot more, factors that an LLC does not have to worry about.
  • They are also much more flexible when it comes to business owners. There are no limits to the number of owners that the business can have, and they can even operate with just one owner.
  • An LLC will give the owners of the business limited liability, which means they are not liable for any company debts or lawsuits that belong to the company. Debt collectors are not able to take any money from your personal assets, only from the company. Your personal assets and business assets are seen as two completely different entities.
  • Although start up can be expensive, it is very easy to achieve. The paperwork is relatively light and the process is simple enough for most business owners to handle on their own, although there is help out there if necessary. The ongoing requirements usually come on an annual basis.

Cons

  • The fees related to setting up an LLC can work out quite costly, especially so in some states. Although the fees vary greatly state by state, you should expect to pay nearly $500 thanks to the range of fees that are required. These include articles of incorporation fees, annual reporting fees, filing fees, and the fees to a third party if you have had someone else set up the LLC for you.
  • If the company cannot secure a bank loan, then they may find it difficult to attract money from an outside vendor. The problem lies when the business needs an injection of cash. This because venture capitalists tend to only fund corporations and not LLCs.
  • Although the whole idea of an LLC is to protect your assets, the liability does have its limits. In a court proceeding, a judge is able to rule that your LLC structure actually doesn’t protect your personal assets, which is called piercing the corporate veil. There are a number of ways you can be at risk, such as if you don’t clearly separate business transactions from your personal.
  • In a lot of states, if something happens to a member of the LLC, such as if they go bankrupt or leave the company, then the remaining members are the ones that are responsible for the termination of the business, which includes dealing with legal and financial matters.

How to form an LLC

Forming an LLC is not particularly hard, but it can be time consuming, and a little confusing if you don’t know what you are doing. There are several steps associated with forming an LLC, and although the process is similar in all states, some may have additional forms or requirements.

Choose-Your-Business-Name

Step 1: Choose a name

The first stage of the process is choosing a name. Your name of choice should follow all the state guidelines and can’t already be a formed business in that state, so the name has to be unique.


Registered-Agent-Service

Step 2: Assign a Registered Agent

The next step in the process is to assign a registered agent to your company. This is the person that handles all of the legal mail and papers on behalf of the LLC. You are able to be your own registered agent, or have someone you know be a registered agent of pay a company to be your registered agent.


Step 3: File Articles of Organization

It is then time for you to file your Articles of Organization with your local office for Secretary of State. These forms show the basic information about the company, and these could differ from state to state. For most, you will need to supply information such as the company name, the LLC address, a list of the owners, and name and address of the registered agent to name a few of the fields required.


Operating-Agreement-

Step 4: Create an Operating Agreement

An operating agreement is not required by all states, but even if it is not required by the state, it is still advisable that you have one. This document stipulates how the LLC will be managed and run. It explains elements such as how profits and losses will be managed and the procedures for new members etc. It may also stipulate how the LLC would be dissolved. This should be kept with your business records, and updates whenever there are changes in the business.


Step 5: Obtain an EIN

Again, this step is not required in all states or for all businesses, but if the business has more than one owner, you’ll have to establish an Employer Identification Number to identify the company.


Step 6: Extras

Once your LLC has been set up, you will need to check with your local state, county and town offices to see if there are any business licenses or permits that you should be aware of. If there is, then these will need to be filed to ensure your company follows local requirements. Sometimes these will have to be in place before you start operating your business. If you are selling goods that require local sales tax, then you will also need to file with your local tax office.

As mentioned previously, it is very important to note that these may not be the whole list of steps, as some states may have some additional or different requirements to follow. Once you have filed your LLC, from then on you will have to file an annual report, which can cost further filing fees. In some cases, this is a few $100 every year.


What is a S-Corp?

S Corp stands for S Corporation, and is also sometimes referred to as an S subchapter. It is a tax election which is used to let the IRS known that you have chosen for your business to be taxed as a partnership. To become an S Corp, you will have to first go through the process of registering your business as either a C corporation or an LLC. This will prevent your business from incurring corporate level double taxation.

If you are a business owner of an S corp, you will be known instead as a shareholder, and even if you own the business, then you will still be considered an employee, so will have to pay yourself a salary. All profits, losses, credits and deductions are taxed as the shareholder level. You are able to have up to 100 shareholders and still remain as an S Corp. The key takeaway here is that an S corp is actually not a type of business, it is a type of tax election, which is why an LLC can also be an S corp.

Essentially, the main difference between an LLC and an S Corp when it comes to taxation is that owners that work in an S are also considered company employees, which LLC owners are considered self employed.

It should be noted that S Corp owners, who are also employees, have to pay themselves a reasonable salary for the work that they do in the business.


Pros and Cons of S-Corp

Pros

  • One of the biggest benefits of an S Corporation is that by becoming an S Corp, you avoid the double taxation that you are charged with a regular C Corporation. This status will pass the income or losses of the business to the shareholders, who will then show this on their personal tax returns. You will still have to file a tax return every year.
  • All business many go through expenses and losses, especially at the start of the business’ life. With an S Corp, these are able to be offset against your personal income.

Cons

  • Although at first, passing the income through shareholders may seem like an advantage, it could also be a disadvantage. When the business is making a profit, then the shareholders have to pay an income tax on their part of the profits, even if that money is not given to them. In a C Corporation, the shareholders don’t have to pay taxes until distributions are made.
  • For many, selling a business that they own can be a part of their retirement strategy. If the business is an S Corp, then it would have reduced taxable gains when the business is sold.
  • Growing a business will almost always require money, therefore venture capital is often required. An S Corp can be a lot less attractive to outside investors as venture capitalists will not want to see the pass through setup.
  • As an S Corp and not an LLC, you will still have to meet the requirements of a corporation, which includes having regular meeting and maintaining company minutes. You will also have to perform constant stock transfer and record maintenance. This can be a lot of added time and stress.
  • The IRS has been known to pay a lot more attention to the records of S Corporations, which means if the business does not meet their exact requirements, then they could have the privilege of being an S Corp revoked.

S-Corp Requirements

There are a few requirements that come with forming an S Corp, which may prevent some companies from making this move. In order to be eligible to be taxed in this way, you must meet the following:

  • You have to be a U.S business.
  • There can’t be more than 100 owners of the business, anything over this amount can’t be taxed as an S Corp.
  • If you are being taxed as an S Corp, then the owners can be partnerships, corporations or non-resident aliens.
  • There can only be one class of stock.

How to file as an S Corp

If you meet all of the requirements and your business qualifies to be taxed as an S Corp, you then have to set it up. This is a relatively simple process.

If you haven’t already done it, then you have to actually form the LLC or the corporation. The second step is then filling out and filing the form for articles of incorporation, which can also be called the certificate of incorporation. This can be filed to the secretary of state’s office where your business is. This form will detail all the basics of your business.

Once this has been completed, you file a form with the IRS, electing S Corporation taxation. Your state will have to first accept the above forms and your business name. The Form 2553 can be found on the IRS website or at any local IRS office. Every shareholder in the business must sign the form before it is submitted to the IRS, or it is not official. It must be filed by March 15 of the tax year during which you want to convert to an S Corporation. Your business will then review the form and make sure your business makes all the necessary requirements.


S-Corp Fees

The fees that are required to establish an S Corporation can change and vary depending on a number of factors. One of the depending factors is the complexity of the corporation and state where the business is established. Some of the key fees that you should expect to pay include fees of the articles of incorporation, which typically range between $100 and $250. If you choose to have a lawyer process the fees for you, then the price of this service can add up considerably. Prices for lawyers tend to start at a few hundred dollars, but is the structure of the S Corporation is very complicated and requires a lot of time and work, then this can potentially add up to a few thousand dollars.

You then have to consider annual reporting fees in a state, which range between $500 and $800 every year, plus insurance costs, which depends on the type of business. As you can see, setting up as an S Corp is an expensive process, and something that should be taken into consideration when making the decision of how you want your business to be taxed.


Best 2 Services to Help You Create an S Corp or LLC

For many, especially those that are new to running a business, the whole process of forming an LLC or an S Corp can be a little daunting. There are quite a few processes to go through and forms to fill out, which is also time consuming. It is not surprising, therefore, that many companies opt to have a third party service do all the hard work for them. There are many companies out there that will complete this for you, some of which are better than others. Two of the best and most reputable are Zenbusiness and IncAuthority.

#1: Zenbusiness

Zenbusiness is one of the best, and therefore most popular, business formation services out there. They offer exceptional services at some of the cheapest prices, making the process of idea to opening easier. The experts will help you navigate the business start-up process, which includes helping you find the right business structure and registering your business. The company offers an LLC formation service package which is very cheap, and offers everything you need to form a business, while also providing a service to help your business become an S Corp, with the customer service team on hand to help you every step of the way.

Check out our ZenBusiness review.

$49

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Rating: 4.8/5
Review count: 4500+

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Form an LLC today with ZenBusiness for only $49. They Have 98% customer satisfaction rating and over 4500+ verified reviews.


#2: IncAuthority

IncAuthority is another helpful, inexpensive service provider who can help you start your LLC or S Corp with ease. In fact, IncAuthrouty will even do it for free. They have thousands of positive online reviews, and have helped over 100,000 businesses successfully come into formation. They seriously know how to get the job done. They also offer a free business name availability search and also offer to be your registered agent for free for a year. They do, however, have a few upsells, although these are easy to ignore.

Here is a full review of Incauthority.

$0+State Fees

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Rating: 4.8/5
Review count: 4500+

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Form an LLC today with IncAuthority starting at $0+state fees. They’re one of best-known services with lots of great customer experience.


Lastly, Why Make The Decision?

If you make the right choice, changing tax classification could end up saving the business a lot of money in the long run. Alternatively, if you end up choosing the wrong classification, then it could have the opposite effect. The decision is not always obvious, which is why it is going to take some thinking about.

The things to consider are your company’s profitability, the potential taxes of the business, and the plans for growing the business in the future, plus your plans for retirement.

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About the Author
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Founder & author

Ian Broderick is an avid author and owner of LLCGuys.com. He's been involved with the LLC formation field for over 4 years. On top of that, he has worked in several well-known LLC formation service providers. Now he decided to share his knowledge and advice with everybody. Since there are a lot of questions and concerns surrounding this field - his aim is to make LLCGuys a top-notch information provider in regards to LLC creation, service reviews and etc..

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