The limited liability company, also called LLC, is a business entity that protects its owners from personal responsibility or liability from the debts or lawsuits of the company. An S corporation is not exactly a business entity type, but rather a classification created by Subchapter S of the Internal Revenue Code. It is usually created under state law by first establishing C-corporations, then filing an “S” election with the IRS. A C corporation is a business entity that allows owners, or shareholders, to be taxed separately from the entity. In a LLC and S corporation taxation flows-through or passes-through to the members of the LLC, meaning the business does not pay corporate taxes. (Reed, 2023) A C corporation is subject to corporate income taxation. (Ancheta, 2023) C corporations are subject to double taxation, meaning they pay tax on their profits at a corporate level and personal level. S corporations cannot be owned by more than 100 shareholders, non-U.S. citizenships or any other type of legal entity, but LLC’s do not have those restrictions. (Kellman, 2023) In a C corporation there is no limit to the number of shareholders, and anyone can own shares, including business entities and non-U.S. citizens. To dissolve an LLC the owners must liquidate assets, pay off creditors, and file papers in accordance with their agreements and their state laws. Dissolution of the S-corporations and C-corporations requires selling off the shares per the shareholder agreement.
LLCs have more flexibility in the management of their company structure than the S corporations. The LLC owners can choose to be managed by a member or managed by a manager. But S corporations have to be managed by a board of directors and officers. This is also true for the C corporation. S corporations are usually higher in the initial cost to set up, as well as ongoing costs because of the formal administrative requirements, like regular meetings, issuing stock certificates, etc. They also have more costs in keeping with state and federal compliance expenses for taxes. Whereas this is not the case with LLC.
References
Ancheta, A. (2023, August 14). What is a C corp?. Investopedia. https://www.investopedia.com/terms/c/c-corporation.asp
Kellman, J. (2023, November 14). LLC vs S Corp (what’s the difference?). MarketWatch. https://www.marketwatch.com/guides/business/llc-or-s-corp/
Reed, E. (2023, March 2). How the LLC pass-through taxation works. Nasdaq. https://www.nasdaq.com/articles/how-the-llc-pass-through-taxation-works
