Is It Better To Choose An S-Corporation Or An LLC?


This is the question we get asked on a daily basis and one that should not be taken lightly. Both an LLC and S-Corporation offer many advantages in the way of liability protection for their owners, but they also differ greatly in ownership, management and taxing issues.


S-Corporations are owned by shareholders, while LLCs are owned by members. LLCs have greater flexibility of management and ownership than an S-Corporation. With an LLC, anybody or even another entity can be a member. With an S-Corporation you are limited to 100 shareholders, they all must be a natural person, not another business entity, and they cannot be a foreign citizen.

Liability Protection:

LLCs and S-Corporations are similar in the level of liability protection afforded the owners. Distribution of Profits and Losses:

With an LLC you have flexibility in regard to the distribution of profits and losses, unlike an S-corporation where profits and losses are passed to the individual shareholders based on the number of shares they have in the company.

Example: Let’s say Susan invests $35,000 into the LLC and Jack only invests $8,000 but does most of the leg work to keep the company going. Because of the split of work vs. investment, Susan and Jack decide that the profits and losses will be distributed 60% vs. 40%. With the LLC they are not limited to just membership interest in determining how the profits and losses will be distributed.

Taxing Issues:

Both the LLC and the S-Corporation are taxed as pass-through entities, which means profits and losses pass through to the owners on their personal income tax return. As a member of an LLC, both salaries and profits are subject to self-employment tax which is usually around 15.3%. With an S-Corporation, only the salaries are subject to self-employment tax.

Entity Comparison Chart

The following table provides a look at the LLC vs Corporation, and LLC vs S-Corporation. Tax comparisons can be found in the lower portion of the table.


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Type of

Stock, there may be different classes.

Membership interests. There may be different classes of membership. One class of stock. Which may be voting or non-voting.
Eligible Owners No restrictions. No restrictions. 100 shareholder limit. No non-individual and no non-resident alien shareholders.
Management Managed by director(s) and officer(s). Two Management Types
- Managed by Manager
- Managed by Members
Managed by director(s) and officer(s).
Allocations of Ownership None. Dividends must be paid based upon stock ownership. Permitted if the allocations have substantial economic effect. None. Income, gain, and loss pass-through to the shareholders based on the percentage of shares owned.
Liability Protection There is limited liability for shareholders, officers and directors. There is limited liability for members and managers (if applicable) There is limited liability for shareholders, officers and directors.
Duration Perpetual Dissolves at the time specified in the Operating Agreement or upon the loss of a member unless other members agree to continue. Perpetual
Transfer of Ownership Shares freely transferred. There may be restrictions under certain state laws. Shares can be transferred only to eligible S-corporation shareholders

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