The question as to the difference between a Limited Liability Company (“LLC”) and an “S” Corporation is one that is commonly asked by clients. Typically, they want to have a sort of comparison between the two types of entities. One major similarity between both is the fact that they are pass-through tax entities and this simply means that the owner(s)’s personal income tax reflects the the income and losses registered by the entity. In terms of liability protection, the S Corporation would present a more potent safeguard although this depends on the peculiar laws of the state in which it is registered.
Differences include the number of shareholders; where the S Corporation can only have 75, the LLC may have as many as it desires and while anyone without geographical limitations may become a shareholder of an LLC, only United States citizens may become shareholders in an S Corporation. Ownership of an S Corporation also excludes C Corporations, partnerships, Limited Liability Companies, various trust entities as well as other S Corporations. LLCs however, are not so limited. Only one class of stock is accommodated within the S Corporation and the percentage of pass-through income or loss is a function of the ownership percentage in the stock but the LLC again, is devoid of these restrictions.
The transfer of stock to another party is freely done in the S Corporation but an LLC does not permit it as the general procedure is for approval to be obtained from other members. This is very beneficial in protection of assets as it ensures that anyone who is being admitted into the company is vetted thus avoiding cases of competitors or creditors joining the company.
Self-employment taxes are payable by LLC on most of their income and here, the S Corporations have an advantage over the LLC as their dividends are not subject to self-employment taxes.