As a business owner, it only makes sense to protect your personal assets from company debts and liabilities. If you’re struggling to decide between the default limited liability corporation (LLC) status or electing an S corporation (S corp) designation for your business, you’re not alone.

Read on to learn more about the differences between an LLC and an S Corp as well as when to choose S corp status for your small business.

Key Differences Between an LLC and an S Corp

Owners of S corps and LLCs both enjoy limited personal liability, they both avoid “double taxation,” and they both pay income taxes on a ”pass-through” basis like sole proprietors and partnerships.

The LLC and S corp business structures are most useful for small business owners or sole proprietors who want to receive the limited liability of a corporation but have a small enough company to avoid dealing with the double taxation of the traditional C corporation (C corp). For example, one of the requirements for electing the S corp tax designation is that an entity has no more than 100 shareholders. Aside from certain tax considerations, federal and state governments treat LLCs and S corps virtually the same.

The main difference between an LLC and an S corp is that S corp status enables business owners to be taxed gas employees of the business. This often reduces their tax burden. Other key differences between these two business structures relate to their ownership, management structure, business operations, and requirements.

LLC vs. S Corp: Taxes

The Internal Revenue Service (IRS) treats LLCs and S corps as partnerships for tax purposes. While these business entities differ with respect to their corporate operations, both have their income taxed on a “pass-through” basis via their owners’ personal tax returns. This means there’s no C corp double taxation issue in which the IRS taxes a C corp’s income once at the corporate level and then again after its distribution to shareholders. The IRS taxes LLC and S corp income only once as the personal income of their respective owners.

LLC vs. S Corp: Ownership

An LLC may have an unlimited number of owners — commonly referred to as “members.” These owners may be U.S. citizens, non-U.S. citizens, and non-U.S. residents. Any other type of corporate entity also may own an LLC, and LLCs face substantially less regulation regarding the formation of subsidiaries.

The IRS is more restrictive regarding S corp ownership. These businesses can’t have more than 100 principal shareholders or owners. S corp also can’t be owned by individuals who aren’t U.S. citizens or permanent residents. Moreover, no other corporate entity may own an S corp. This limitation includes ownership by other S corps, C corps, LLCs, business partnerships, or sole proprietorships.

LLC vs. S Corp: Management Structure

The owners or members of an LLC are free to choose if they or a designated manager will run the business’s daily operations. If the LLC elects to have one or more of its owners occupy the company management positions, then the business would operate similarly to a partnership.

By law, an S corp must have a board of directors and corporate officers. The board of directors oversees the management of the company and is in charge of major corporate decisions. The corporate officers, such as the chief executive officer (CEO) and chief financial officer (CFO), manage the company’s business operations on a day-to-day basis.

LLC vs. S Corp: Business Operations

For LLCs, business operations are much simpler than in other corporate structures. While LLCs should follow the same guidelines as S corps as a best practice, they aren’t legally required to do so. Some of these guidelines include adopting bylaws and conducting annual meetings.

By creating an LLC Operating Agreement, which can include extremely flexible terms, LLC owners may set up their businesses to operate in whatever fashion they prefer. LLCs aren’t required to keep and maintain records of company meetings and decisions in the way S corps must.

Significant legal differences in terms of formal operational requirements also exist. For example, S corps have a much more rigid structure. The numerous internal formalities required for S corps include strict regulations on adopting corporate bylaws, conducting initial and annual shareholders meetings, keeping and retaining company meeting minutes, and following extensive regulations related to issuing stock shares.

LLC vs. S Corp: Requirements

LLC business owners can choose to reinvest as much of their business’s profits as they see fit in any given tax year.

The default LLC tax structure best suits businesses with these characteristics:

• Their owners reinvest profits back into the business to promote growth.
• The cost of bookkeeping and payroll services would outweigh the tax benefit of an S corp.

Meanwhile, an S corp must meet these requirements:

• It can have no more than 100 shareholders.
• All shareholders must be private individuals (not other business entities).
• Shareholders can’t be non-resident aliens.
• The business may only issue one class of stock.