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Limited Liability Company (LLC) vs S Corporation

Posted by Elizabeth R. Southerland | Dec 13, 2017 | 0 Comments

One consideration when forming a business is what kind of entity is the most appropriate for you and your business. Two common entities used by small businesses in California are the Limited Liability Company (LLC) and the S corporation.

Although, both types of entities provide the owner with limited liability, there are some key differences between the two structures. The comparison chart shows some of the similarities and differences between the two types of entities.

LLC

S Corp

Formalities

File Articles of Organization with the California Secretary of State to form the LLC.

Ongoing maintenance of the LLC is often considered more relaxed as there is no legal requirement to hold annual meeting.

Although not required, the LLC should have members sign an Operating Agreement.

Must file a Statement of Information with the Secretary of State every two years on the anniversary of organization or if there is a change in the business that is required to be reported.

Formalities

As well as filing Articles of Incorporation with the Secretary of State the S corp must hold an initial corporate meeting where Directors are elected, corporate officers (president, secretary, CFO) appointed and corporate bylaws are accepted.  

There are strict formalities for the ongoing maintenance of the S corp. The Corporations Code and corporate bylaws require annual meetings which must be documented in the corporation's minute book.

Must file a Statement of Information with the Secretary of State every two years on the anniversary of Incorporation or if there is a change in the business that is required to be reported.

Tax considerations

Federal income tax is “passed through” to the LLC members. If there is just one member then he/she reports income or loss on his/her individual tax return. If there are two or more members, the LLC is taxed as a partnership.

The LLC must pay an annual $800 California state franchise tax

The LLC must also pay an additional California tax on gross receipts over $250,000 – this is a significant disadvantage over an S corp and something to speak to a tax professional about.

Tax considerations

Tax is “passed through” to shareholders or the corporation. This means the corporation pays no federal income tax. Shareholders report the income or loss on their own individual tax returns. There are however, strict eligibility requirements for S corporations.

The S corp must pay and annual $800 California state franchise tax

Potential to save on self-employment tax

Eligibility Requirements

None. Individuals, other LLCs and corporations can all be members of an LLC

Eligibility Requirements

Strict requirements e.g shareholders must be US residents

Management and Control

The owners of an LLC are known as members and they own membership units in the LLC.

At the time or formation you can choose whether the LLC will be managed by all of its members, one or more of its members or by a non-member manager.

Management and Control

­The owners of an S corp are known as shareholders and they own shares in the corporation evidence by stock certificates and recorded in the stock ledger kept in the corporate book.

The S corp is managed by a board of directors who appoints corporate officers (president, secretary, CFO)

Transfer of Ownership

Generally, the membership units of the LLC are easily transferred unless restricted by operating agreement.

Transfer of Ownership

Generally, shares in the S corp are easily transferred  unless restricted by a Stock Purchase Agreement

This is not an exhaustive list of factors to consider when choosing the best structure for your business. Each business is different and you should seek advice before forming your entity. At the Law Offices of Thomas E. Malley we will help you decide which business entity would best suit your needs. We provide formation services as well as ongoing assistance to ensure compliance with the law.

About the Author

Elizabeth R. Southerland

Libby began working at the Law Offices of Thomas Malley in 2015 as a Paralegal. Libby obtained her undergraduate degree in Environment and Business at the University of Leeds in the United Kingdom and her law degree for the College in London. She worked at a small family and criminal practice in ...

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