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Both an S Corporation and Limited Liability Company provide owners personal asset protection and pass thru tax treatment, but there are differences between the entity types to consider before making your decision.

S Corporation

  • Rigid structure
    • Bylaws
    • Shareholder Agreement
    • Easier to sell shares
    • Better suited for large numbers of owners
    • Capital calls not common
  • Shareholder requirements
    • Limited to 100 shareholders (up from 75 previously)
    • Shareholders can only be individuals or trusts (corporations, LLC, LP, etc. not permitted)
    • Shareholders must be citizens or legal residents of the US (no foreign investors allowed)
  • Only one class of stock permitted, but different voting rights allowed per shareholders
  • A company tax return is required for the corporation
  • Taxable income per shareholder determined by revenue generated by the company on a percentage basis of ownership and cannot be modified.  Even if money is left in the company, the shareholder is still taxed on the revenue.
  • You can avoid self-employment 15% tax (“SE Tax”) for money paid as a dividend as opposed to payment as a salary; although, you must incur payroll expenses and rile quarterly payroll returns which will cost $1,000-$2,000 per year.  The tax savings pertaining to SE Tax      would have to be over the cost for payroll expenses and returns before you realize a benefit.  If predominate part of business is the sale of services or products set up as a S Corp. because this revenue would be subject to SE Tax.
  • Owners must be paid a reasonable salary per IRS guidelines even if the company is losing money
  • Can convert an S Corp. to a C Corp.


Limited Liability Company

  • Flexible structure
    • Operating Agreement which can include nonstandard contractual terms
    • There is no requirement to disclose the officers or directors
    • Capital calls are common
    • Less formalities – Annual meetings not necessary
  • Members
    • Can be foreign individuals or companies
    • Members can be corporations, partnerships, trusts, etc.
    • No limitations on the number or type of members
  • Different classes of membership units permitted
    • All generated income subject to self-employment 15% tax (“SE Tax”).  If only one member only file schedule C (sole proprietorship).  If over one member, a Form 1065 partnership return (IRS K-1 is required).
  • Salary to owners not required.  If no employees, no need for payroll services.
  • Only taxed on the income attributable to the member that received the revenue from the company
  • Profits/losses to members can differ from ownership percentages
  • If predominate income is from capital gains, rental income, or investments which wouldn’t be subject to SE Tax then it would be better to form an LLC.
  • LLC can be converted to a corporation in the future if necessary
  • Can elect S Corp. tax status if entity qualifies per IRS guidelines


Please call if you have questions about different business entities.