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What is the difference between a LLC or S corp?

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Quick Answer

A limited liability company, or LLC, is a business structure that is very similar to a general partnership or sole-proprietorship. An S corporation, commonly known as an S corp, on the other hand, is a corporation that has elected to be taxed under subchapter S of the IRS.

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Full Answer

An LLC is a relatively simple and flexible business structure. LLC owners avoid double taxation because in most cases the owners report losses and profits on their federal tax returns. Starting this business structure is quite simple as it requires fewer forms for registration, and filing taxes is a once-a-year activity. In addition, LLCs do not have to hold formal meetings and keep minutes. An LLC has a limited life, meaning that when a member dies or files for bankruptcy, the entity is dissolved.

Startup costs are higher for an S corp. A business must first be registered as a corporation in the state in which it is headquartered and then file to be considered as an S corp. The IRS views an S corp as a legal entity separate from its owners. This means that the owners’ financial liability is limited. An S corp itself is not taxed. Rather the profits and losses of an S corp are passed through to the personal tax return of the shareholders.

The rules for taxing an S corp are a bit more complicated because the business must pay the shareholders reasonable compensation or risk having IRS reclassify any extra corporate earnings as wages. Unlike an LLC, an S corp does not have a limited life. If a shareholder dies or sells his/her shares, the company can continue conducting business relatively undisturbed.

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