LLC vs S Corp
When starting a small business, people often wonder if they should go for Limited Liability Companies (LLC) or S Corps. Well, both have its own advantages, and also disadvantages. Here, let us look at some of the differences between the two.
LLC will be a good choice if you think of operational flexibility. You can choose S Corp if you really want to save on employment tax.
One of the main differences that can be seen between LLC and S Corp is in regards to shareholders. In S Corp, the shareholders are limited to 75 members. Moreover, the shareholders cannot be non-residents, and should also not be part of a LLC or any other corporation. On the other hand, there are no limits, or any restrictions, for a membership in LLC. They have a flexible ownership structure.
About the management of S Corp, the directors manage the company. On the contrary, the management of LLC is simpler, and does not have any formalities as that of the S Corp. Unlike the S Corp, members manage the LLC.
Another difference that can be seen between LLC and S Corp is in the distribution of profit. In distribution of profits in S Corp, there is no flexibility. The profit is normally divided according to the ratio of the shares. On the other hand, there is more flexibility in the distribution of profit in LLC.
One of the noticeable differences between LLC and S Corp is the employment tax. As the LLC owner is considered to be self-employed, he will have to pay employment tax, which goes to Medicare and social security. While calculating the employment tax in LLC, the entire net income is taken into account. Meanwhile, in S Corp, only the salary that is drawn by the owner is subject to employment tax.
Summary
1. In S Corp, the shareholders are limited to 75 members. Moreover, the shareholders cannot be non-residents, and should also not be part of a LLC or any other corporation. On the other hand, there are no limits, or any restrictions, for a membership in LLC.
2. In distribution of profits in S Corp, there is no flexibility, but there is more flexibility in the distribution of profit in LLC.
3. While calculating the employment tax in LLC, the entire net income is taken into account. Meanwhile, in S Corp, only the salary that is drawn by the owner is subject to employment tax.