When starting your own company it can be difficult to determine what the business structure ideal should be.  Most people stay in the realm of sole proprietorship, partnership, or corporation.  These all have their advantages and disadvantages, but often the jump between them is just too large.  There is two types of business entities that lie between the general partnership and the C – Corporation.  Let’s compare the differences between LLC vs S Corporation.

Limited Liability Company (LLC)

A LLC is a more formal partnership that allows the risk to be stopped at the company level.  Essentially this means the profits are passed to the owners of the LLC for them to claim on their personal taxes.  However, if something goes bad (like a law suit) the LLC is responsible for the damages, but if the LLC goes bankrupt than the owners aren’t liable.  Most creditors see through this so for financial risk in a new LLC the creditors will require the owners to personally guarantee the loan.

One quirky deal that is annoying with an LLC is if one of the owners goes bankrupt or dies the LLC will be dissolved.  This is more of a nuisance because the assets must be divided and then a new deal negotiated if you wish to reform the LLC with the original partners and the new owner of the dead owner’s assets.

S Corporation

An S Corporation actually runs more similar to a LLC than a traditional corporation.  Shares of the company can be divided amongst as many as 75 different individuals.  Companies can’t own shares of an S-Corp.  However, unlike traditional corporations, the profits are passed through in equal allotments to the share holders for them to claim on their personal taxes.

LLC vs S Corporation

Both the LLC and the S Corp pass the profits through to the business owners.  The biggest advantage of LLC is the simplicity in paper work.  No meetings or formal minutes are required to be maintained and the owners won’t change hands without knowledge of the other partners.  The biggest advantage to the S Corp is the easy transfer of ownership without swinging the management team of the company and the smoother transition to a public company if that is the intent of the current management.

The biggest disadvantage to the LLC is the hurdle to become a standard corporation and the immobility of ownership changes.  The biggest disadvantage to the S-Corp is that you must pay fair wages to yourself and other owners who work in the company.  This puts these wages subject to employment taxes which can be very costly.  The LLC is better if the ownership will be doing the majority of the work, the S-Corp is better if the ownership will be backing off day to day operations or the wage is relatively small compared to the total earnings of the company.   If the company is not yet profiting the fair wage rule does not apply so you can save some tax dollars during the start up.