Both LLCs and S Corporations offer limited liability while providing pass-through taxation. The way they are taxed, however, is entirely different under the tax code. LLCs are taxed under Subchapter K (the same as partnerships) and S Corporations under Subchapter S (unique to S Corporations). Here are a few things to keep in mind:
- Only U.S. Citizen or Permanent Resident Shareholders
- Only one class of stock (basically)
- No entity shareholders, such as corporations
- No more than 100 shareholders
S Corporations require an officer, which must receive a salary. You must pay payroll taxes on this salary and therefore file an extra tax form (941). However, you generally only owe self-employment taxes on the salary, and the rest is free from self-employment (FICA) taxes so there is less tax burden as you make more money.
- No restrictions as in S Corporations (i.e. can have foreigners, entity shareholders, more than 100 members, and different types of payment).
LLCs at their earliest stage are simpler than S Corporations if you select member-managed LLCs because you will not have to pay yourself a salary and pay payroll taxes. However, all the money you make from an LLC is subject to self-employment taxes, so as you grow bigger, LLCs are actually more costly.
At their complex stage, LLCs are more complex than S Corps because they allow for special ways to split profits that are disproportionate to interests, and other profit splitting methods, all of which require consulting with an attorney or accountant as they are beyond the basic setup provided by online formation companies.
Note: This is not legal advice and does not create an attorney-client relationship.