What is an S Corporation?
An S Corporation, based on the United States’ Federal Tax Law, is any corporation that makes a valid election to be taxed specifically under Subchapter S of Chapter 1 of the Internal Revenue Code. As a result of this filing, the S corporation does not pay any federal income taxes; instead, the corporation’s net profits or losses are divided among and passed down to the company’s shareholders.
Following this process, the shareholders must then report the income or losses on their own individual income tax returns; this concept is regarded as single taxation. The S corporation therefore possesses a unique taxation model; the majority of these corporations are fairly small with relatively few shareholders. If the corporation is taxed as a regular corporation it would incur double taxation, where both the corporation’s profits and the shareholder’s dividends will be taxed.
What is an LLC?
An LLC or limited liability company is a fairly lax form of enterprise that combines elements of corporate and partnership structures. An LLC is provides limited liability to its owners; the business is created as a hybrid entity that possesses certain characteristics of a sole proprietorship or partnership and a corporation. Although it is a type of business entity, an LLC is a form of unincorporated association and is not defined as a type of corporation. The primary characteristic that is shared between an LLC and a corporation is limited liability, while the primary characteristic shared between an LLC and a partnership is the availability of pass-through income taxation. As a result of this hybrid status, the LLC formation is regarded as more flexible than a corporation and is typically beneficial for companies with one owner.
LLC vs. S Corp in taxation: The LLC is given a choice of a taxation structure, between a partnership, S or C corporation, while the S corporation must choose to be taxed under Subchapter S of the IRS revenue code.
LLC vs. S Corp in regards to shareholder meetings: The LLC rarely will have shareholder meetings while an S corporation is required to have regular board and shareholder meetings.
LLC vs. S Corp in regards to ownership: Members of the LLC are the owners while the Shareholders are owners of the S-Corp
LLC vs. S Corp in regards to Legal Definition: An LLC is a separate entity from its partners, but members are susceptible to liability for non-fiscal obligations. An s-corporation is a separate entity from shareholders (owners) and they are not liable for any fiscal obligations.