What is the difference between an LLC and an S-corp incorporation?


Quick Answer

Primary differences between a limited liability company, or LLC, and an S-Corporation center on more restrictive ownership and earnings distribution requirements, and more formal structural requirements for S-Corporations. While an LLC can have unlimited owners, and S-Corporation is limited to 100 shareholders, according to Inc. magazine.

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Full Answer

Member owners in an LLC have much greater flexibility in ownership involvement and earnings distributions relative to S-Corporations. Owners can manage the LLC or have someone else manage the LLC, according to BizFilings. Shareholders are sometimes paid as employees of the S-Corporation, but the IRS monitors salary practices. In an LLC, owners can agree to distribute earnings in proportion to the financial and time investments of each owner. Someone who works more for the business may get a higher percentage of income distributions, for instance. In an S-Corporation, earnings distributions must be proportionate to ownership, reports Inc. If someone owns 5 percent of the company, he gets 5 percent of earnings distributions.

LLC management can vary between a partnership-style and a corporate-style. When owners run the company, the management is more similar to a partnership. With hired managers, it functions more like a corporate structure, according to BizFilings. S-Corporations have directors and officers. S-Corporation stock allows for easy transfer of ownership, but LLC stock transfers must be approved by other owner members. Because S-Corporation owners can act like employees, they may pay less in self-employment taxes than an LLC owner.

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