LLC Vs. Subchapter S
A limited liability company (LLC) offers a mixture of limited liability protection and operational flexibility. A Subchapter S corporation is a special corporate entity that allows the owners of the company to pass their portion of company profits and losses to their personal income tax return. LLCs are a relatively new type of business entity that became popular in the U.S. during the 1990s.
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Time Frame
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One difference between an LLC and a Subchapter S corporation is the length of time that each entity exists. Subchapter S corporations have an unlimited life that will continue regardless of who the owners and directors are of the company. LLCs may end automatically if a member dies or decides to sell his interest in the company. An LLC will automatically come to an end according to the dissolution date listed in the company's articles of organization.
Benefits
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A major benefit of an LLC over a Subchapter S corporation concerns profit allocation. Members of an LLC can divide the company's profits and losses in any manner. A Subchapter S corporation does not have this same luxury and is required to divide the company's profits and losses according to each shareholder's ownership interest in the business. If a shareholder in a Subchapter S corporation owns 15 percent of the business, then the shareholder will receive 15 percent of the company's profits. In an LLC, a member may own 10 percent of the company but receive 25 percent of the LLC's profits, if the other members of the LLC agree to such an arrangement. Another benefit of an LLC is that it may have an unlimited number of members while a Subchapter S corporation must have 100 shareholders or less.
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Significance
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LLCs have a more flexible structure in comparison to Subchapter S corporations. LLCs may be managed by members of the company or by non-members. Subchapter S corporations have a definitive company structure that must include directors and officers. LLCs that are managed by members of the company operate more like a partnership with an informal management structure. LLCs that are managed by non-members operate like a corporation with a more formal business structure. Unlike an LLC, a Subchapter S corporation does not have the option of selecting its management structure.
Considerations
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Subchapter S corporations have many more ongoing formalities in comparison to LLCs. Subchapter S corporations are required to hold annual meetings, record minutes from the company's meetings and create financial statements. LLCs do not have to adhere to such requirements. In addition, Subchapter S corporations are required to select directors whereas an LLCs do not have a board of directors. Another consideration regarding Subchapter S corporations is that stock can be issued as a means of raising capital. This is not the case in in LLCs, which do not have the ability to issue stock to potential investors.
Ownership
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Another difference between an LLC and a Subchapter S corporation concerns who can take ownership of the company. LLC members may consist of other LLCs, corporations, partnerships, foreign entities and individuals. Shareholders of a Subchapter S corporation may not be foreign entities, corporations, partnerships or LLCs. All individual shareholders of a Subchapter S corporation must be U.S. citizens or resident aliens. Non-resident aliens are not allowed to own shares in a Subchapter S corporation, but non-resident aliens may be members of an LLC.
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