Subchapter S Versus LLC Showdown…

For many new Illinois businesses the choice will come down to two of the most often considered types of corporations: Subchapter S (S Corp) and LLC (Limited Liability Company).

Here are some key points about each type of incorporation:

Both owners of S Corporations and Limited Liability Companies have limited personal liability. In contrast, sole proprietors and partners have unlimited personal risk and are at the mercy of the court’s decision.

Both offer protection of personal assets but allow income and losses to be reported on a personal tax return.

Nolo’s Legal Guide for Starting and Running a Small Business states, “For the majority of small businesses, the relative simplicity and flexibility of the LLC make it the better choice. This is especially true if your business will hold property, such as real estate, that’s likely to increase in value.”

Both Subchapter S corporations and Limited Liability Companies help owners avoid  “double taxation” and to pay income taxes on a flow-through basis like sole proprietors and partners.

A LLC can be formed in 1-step. With a Subchapter S corporation a general for profit corporation must be formed first. (this is a small advantage)

An LLC need not hold annual meetings or to keep formal minutes, but a S Corporation is required to do both.

Members of a limited liability corporation can split gains and losses as they wish. With a S corporation, shareholders must receive dividends according to the number of shares that they own.

Limited Liablity companies can be owned by individuals or businesses or any combination of each. S corporations can only be owned by US citizens and resident aliens. Usually no other entities can own a subchapter s corporation.

If operational ease and flexibility are important to you, an LLC is a good choice. If you are looking to save on employment tax and your situation warrants it, an S corporation could work for you.

Here is a chart that shows some differences between Subchapter S (S Corps) and LLC’s.

Factor	Subchapter S Corp.	Limited Liability Company
Liability Protection	Yes	Yes
Control	Board of Directors/Officers	Managed by members or managers
Federal Income Tax	Pass-through	Pass-through
Simplicity of day to day operation	Some formal requirements such as record keeping, annual meetings, etc.	Simple
Ownership Restrictions	Yes	No
Flexibility in Profit-Sharing	No	Yes
Employment Tax	Employment tax on salary, not dividends paid to shareholders	Self-employment tax on net income

More Subchapter S information:

Subchapter S Incorporation Advantages and Disadvantages – There are a number of options for business owners to consider when incorporating.

What is a Subchapter S (S Corporation)? - Subchapter S is an IRS designation for a Profit Corporation that distinguishes it…

Incorporate your Subchapter S – (S Corporation) online now.

More LLC information:

LLC Advantages and Disadvantages – There are many advantages and some disadvantages you should be aware of…

What is a Series LLC? – The State of Illinois allows for registration of a Series LLC if you are planning…

What is a LLC? – LLC incorporation has become a very popular form of incorporation over the years….

Incorporate your LLC now using our online form.