For many small business owners, choosing whether to form a Corporation or a Limited Liability Company (LLC) is one of the very first decisions to be made. In order to decide which choice is best for your small business, it is essential to understand the differences between a Corporation and an LLC. In this article, we will discuss specifically the differences between an LLC and an S Corporation (a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code).
Formation: In order to form both an S Corp or an LLC, business owners must file with the State of Ohio and must pay the Ohio filing fee ($125 for forming an LLC and $125 for forming a corporation).
Personal Liability: Shareholders in an S Corp and members in an LLC are typically not held personally liable.
Administrative Requirements: While an LLC has relatively few administrative requirements, an S Corp has to elect a board of directors, has to hold annual meetings, and has to comply with annual report filing requirements.
Management: With an S Corp, shareholders elect directors who manage business activities. With an LLC, on the other hand, members can set up the structure as they choose.
Term: While both S Corps and LLCs can last perpetually, an LLC is potentially subject to the laws of the state it is formed in. S Corps, on the other hand, can extend past death or withdrawal of shareholders without any potential interference by the state.
Taxation: For both an S Corp and an LLC, there is no tax at the entity level. Rather, the income in both the S Corp and LLC are passed through to the shareholders or members.
Double Taxation: Neither an LLC nor an S Corp are subject to double taxation.
Self Employment Tax: In both an S Corp and an LLC, salary is subject to self employment taxes. In an S Corp, however, shareholder distributions are not subject to employment tax.
Transferability of Interest: In an S Corp, interest is transferable if done in compliance with IRS regulations concerning who can own stock. With LLCs, interest may be transferrable, but whether it is is dependent on the restrictions outlined in the operating agreement.
Capital Raising: With S Corps, shares of stock are sold to raise capital, however limitations prevent S corp stock ownership by corporations. With LLCs, owners may sell interests, but doing so is subject to the operating agreement and potentially subject to securities laws.
Ease of Operation: S Corps are not only required to hold annual meetings, they are also required to record corporate minutes, elect a board of directors, and comply with annual report filing requirements. LLCs, on the other hand, are much easier to operate.
Directors/Officers/Members: With an S Corp, if there are less than 3 directors, the number of directors must be equal to the number of shareholders. There is no residency restriction placed on directors, and directors must be at least 18 years old. In an S Corp, it is permissible for one individual to hold all offices. (i.e. president, secretary and treasurer). In Ohio, a listing of directors and/or officers in the articles of incorporation is not required. With an LLC, membership can consist of one or more individuals. Like S Corps, there is no residency restriction placed on members, and members must be 18 years old. Similarly, Ohio does not require listing of LLC members in the articles of organization.
Crumpton Law LLC is a Columbus Small Business Law Firm, with attorney Matthew Crumpton serving as managing member and lead attorney.
Tags: corporation, LLC, Ohio Corporation, Ohio LLC, S Corp, small business