Question

What is a Limited Liability Company, and how does it differ from a S-Corporation?

Answer 1

There are various sorts of business entities from which to pick when forming a company. S corporations and limited liability companies (LLCs) are popular choices, but they differ in many ways, from taxation to management structure. In some cases, a company may be both an LLC and an S-corporation. Here's what you should know about different business types and how they differ before deciding which is best for you.

Small business owners frequently pick an LLC structure because it provides more flexibility than a corporation. However, before making this crucial decision, it's necessary to understand the differences between an LLC and an S-corporation.
Tax differences
An S-corp is not the same as a limited liability company, a sole proprietorship, a partnership, or a corporation. Rather, it's a method of establishing how your company will be taxed that you choose. An S-corporation avoids double taxation, which occurs when a corporation is taxed on its profits and then again on the dividends received as personal earnings by shareholders.

Depending on how the business owner wants to be taxed, an LLC can be an S-corporation or even a C corporation. An LLC is governed by state law, whereas an S-corporation is governed by federal tax law.

Members of an LLC must pay self-employment taxes to the IRS, which include Social Security and Medicare taxes. According to the IRS, the self-employment income tax rate for Social Security and Medicare in 2020 is 12.4 percent for Social Security and 2.9 percent for Medicare. Any profit made by an LLC is considered taxable income.

An S-corp pays its shareholders a salary and the firm pays their payroll taxes, which can be deducted from the company's taxable revenue as a business expenditure. If the company has any residual profits, these are dispersed as dividends to shareholders, which are taxed at a lower rate than regular income.

Management Structure

LLCs and S-corporations have different management structures. When members administer an LLC, it functions similarly to a partnership or, if there is only one member, a sole proprietorship. The LLC will resemble a corporation if it is managed by managers, as members will not be involved in everyday business decisions.
Directors and officers are common in S-corps, and a board of directors monitors corporate formalities and key decisions. The board of directors appoints executives to oversee the day-to-day operations of the company.

Stock structure, subsidiary restrictions, and shareholder structure
S-corporations are limited to a total of 100 shareholders, but LLCs can have an unlimited number of members. Furthermore, S-corporations cannot have non-U.S. citizens as shareholders, whereas LLCs can have non-U.S. citizens as members.
They also have a variety of secondary constraints. S-corporations are prohibited from forming subsidiaries, whereas LLCs are allowed to do so without restriction.
Finally, although LLCs are unable to issue stock, S-corporations can – however only one type of stock can be issued.