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  • Writer's pictureSOPHIA AHMAD

LLC vs. S-Corp: The Similarities and Differences

As you advance along your journey as a business owner or entrepreneur, you’ll eventually reach a point where you must choose to file taxes as an LLC or S-corp. Although these concepts may appear complex initially, the similarities and differences between these two entities are easy to understand. Today, we’ll assess the LLC vs. S-corp so that you’re well-prepared to consult with a tax attorney about your company’s filing status.

LLC vs. S-corp: How Are They Similar?

LLC and S-corp classifications are often confused with one another due to their similarities. These include:

  • Limited liability protection. Owners of LLCs and S corporations are not responsible for the business’s debts or liabilities. LLCs and S-corps operate as separate entities responsible for their own risks and liabilities.

  • Pass-through taxation. When considering an LLC vs. S-corp, it’s important to note that they are both “pass-through tax entities.” This means that no income taxes are paid at the business level. Once the business pays bills and debts, it will pay taxes on the remaining revenue.

  • Ongoing state compliance requirements. Whether you own an LLC or an S corporation, your business will be subject to obligations imposed by LLC statutes and state corporations. This often includes filing annual reports, paying annual fees, and more.

LLC vs. S-corp: How Are They Different?

At a glance, LLCs and S-corps may appear the same, but there are a few key differences you should consider, such as the following:

  • Ownership differs greatly. When considering an LLC vs. S-corp, the structure of ownership is different. LLCs can have a flexible ownership structure, allowing for various ownership classes and different ownership percentages among members. On the other hand, S corporations are limited to a maximum of 100 shareholders, all of whom must be U.S. citizens or residents.

  • Taxation. Compared to S corporations, LLCs have much more flexibility regarding taxation. While LLCs are generally taxed as pass-through entities, you can tax your LLC as a corporation if necessary.

  • Management and operations. LLCs offer more flexibility in terms of management and operations. They can be managed either by their members (owner-managed) or by appointed managers (manager-managed). S corporations, however, have a more structured management approach, with a board of directors overseeing the significant decisions.

LLC vs. S-corp: Which Option Is Right for You?

Most business owners begin their companies as LLCs to protect themselves from personal liability. However, when your profits exceed the amount you expect to pay in owner salaries, filing taxes as an S corporation may be beneficial. Depending on your situation and needs, you could even qualify as both an LLC and S-corp simultaneously, as these classifications are not mutually exclusive.

If you’re unsure whether you should structure your business as an S-corp or an LLC, it may be beneficial to speak with an accountant and tax attorney to ensure you’re making the best decision for your business.

Ahmad Law

Sophia Ahmad Law, APC, was founded in 2016 in the San Francisco Bay Area. We specialize in tax, corporate, and immigration law and represent both businesses and individuals locally, nationally, and internationally.

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