What is an LLC? An LLC is a entity structure where the owners are not personally liable for the company’s debts or liabilities.
What is an S Corp? An S Corp can be set up either as an LLC or a corporation. Then the IRS tax election can be made to adjust how the business is going to be taxed by meeting certain IRS requirements.
Legally they are both separate entities when it comes to state filings.
Both a LLC and S Corp fall under pass through taxation. The income from each flows through to the personal tax return and any tax is paid at an individual level.
A single member LLC is taxed as a sole proprietorship meaning reporting business income and expenses on the personal tax return. Then based on the company’s profits you would pay personal income tax on it
As an S Corp the owner will put business profits and their own salary on the personal tax return.
Typically you might read that owners of either an LLC or S Corp are not personally responsible for the business debts and liabilities. In fact, generally business debt won’t be granted with some type of guarantee from the owner. The LLC /Corporation entity status, if appropriately done, will protect the business owners home and personal assets in the event of a lawsuit.
LLC members can include Non – U.S. citizen/residents but generally with an S Corp they can’t be shareholders.
There is a limit of 100 shareholders in place for an S Corp versus an LLC can have unlimited members.
When forming an LLC you have to start by selecting a business name according to your state’s rules. You will have to file the proper paperwork required based on that state’s filing office. Creating an operating agreement isn’t usually required but should be made as it includes how the LLC will be managed. Final step includes getting permits or licenses that your specific business will need to operate.
Depending on what state your headquarters is at, you will then want to set up this LLC or corporation for the business within that state. The S-corporation status requires the additional election for the S Corp status to be filed with the IRS.
Certain requirements will have to be met and maintained throughout the years. Tolbert CPA can further look into your specific situation and see what is best for your business. Come in for a consultation to walk through the thought process and determine on how the differences between each type of entity affects you.