Sub Chapter S Corporation vs. Limited Liability Company
There are a number of differences between a subchapter S corporation and a limited liability company (LLC) in terms of ownership and ongoing formalities. The owners of a limited liability company appear as members of the business. Owners of a subchapter S corporation are referred to as shareholders.
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Ownership
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An S corporation has certain requirements it must adhere to in order to keep its subchapter S status. An S corporation may have no more than 100 shareholders. As mentioned on the Limited Liability Company Center website, the shareholders of an S corporation must be resident aliens or U.S. citizens. Unlike an LLC, the owners of an S corporation may not be other LLCs, corporations or foreign entities. In addition, a limited liability company may have an unlimited number of members participating in the business.
Profit Allocation
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An LLC has the ability to allocate profits in whatever manner the members find agreeable. This holds true regardless of what contributions members have made to the business. Normally, an LLC indicates the manner in which profits and losses will be allocated in the company's operating agreement. In an S corporation, profits are distributed according to the number of shares the stockholder owns. In other words, the profits of an S corporation are allocated according to the financial contribution made to the business.
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Stock
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One of the biggest differences between an S corporation and a limited liability company concerns the issuance of stock. An S corporation may issue stock to certain investors, as long as the investor isn't an LLC, corporation, foreign entity or nonresident alien. The ability to issue stock makes it easier for an S corporation to raise capital in comparison with an LLC. LLCs lack the ability to issue company stock. As explained on the Residual Rewards website, LLCs can't issue employee shares of stock as a way to entice or reward talented employees.
Formalities
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An S corporation has more ongoing formalities in comparison with an LLC. For example, LLCs aren't required to hold company meetings or record minutes at company meetings. The Money Alert website indicates an S corporation must hold annual meetings, record company meetings, as well as file annual reports at the close of the fiscal year. In addition, S corporations may be required to hold elections for corporate directors or officers. These requirements are absent when it comes to an LLC.
Structure
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An LLC may adapt a member-managed structure or a manager-managed structure. Member-managed LLCs allow the members of the company to oversee the daily activities of the company. Manager-managed LLCs allow nonmember managers to control the day-to-day operations of the company. In this way, LLCs enjoy greater structural flexibility in comparison with an S corporation. S corporations have a definitive structure consisting of directors, officers, shareholders, managers and employees. The directors of an S corporation are responsible for managing the resources of an S corporation. Corporate officers are elected by the S corporation board of directors and are held responsible for implementing decisions made by the board of directors.
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