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What are the differences between an S Corp or an LLC?
An S corporation (S corp) and a limited liability company (LLC) are both popular forms of business entities in the United States, but they have some important differences. Here are some key differences between the two:
- Taxation: The main difference between an S corp and an LLC is the way they are taxed. An S corp is a type of corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. This means that the company’s income, deductions, and credits are passed through to the shareholders, who report them on their individual tax returns. An LLC, on the other hand, can be taxed in different ways depending on how it is structured. By default, an LLC is taxed as a “pass-through” entity, which means that the company’s income is passed through to the members, who report it on their individual tax returns. However, an LLC can also elect to be taxed as a corporation, either as a C corp or an S corp.
- Ownership: An S corp has restrictions on who can be a shareholder, as well as the number of shareholders it can have. For example, an S corp cannot have more than 100 shareholders, and all of its shareholders must be U.S. citizens or residents. An LLC, on the other hand, can have an unlimited number of members (which is what the owners of an LLC are called), and there are no restrictions on who can be a member.
- Management: An S corp is managed by a board of directors, who are elected by the shareholders. The board of directors then hires officers to manage the day-to-day operations of the company. An LLC, on the other hand, can be managed either by its members or by a manager who is appointed by the members.
- Formalities: An S corp is required to follow more formalities than an LLC. For example, an S corp must hold regular shareholder meetings and keep detailed minutes of those meetings. An LLC, on the other hand, has less formal requirements and can operate with more flexibility.
Overall, the decision to form an S corp or an LLC depends on several factors, including the business’s goals, ownership structure, and tax considerations. It’s best to consult with a qualified attorney or accountant to determine which type of entity is best for your specific situation.