Choosing Between a Limited Liability Company (LLC) and a Subchapter S Corporation

The Advantages and Disadvantages of Each Business Form

When you’re starting a new business enterprise, one of the most important decisions you’ll need to make involves the legal form of your company. For many small businesses in particular, that’s often a choice between a limited liability company (LLC) and a Subchapter S corporation. What are these different business structures? And what are the benefits and drawbacks of each?

What Is a Limited Liability Company?

A limited liability company is a legal entity that has the ability to conduct business. The owners of the LLC are called “members.” Because an LLC is a separate legal entity, the personal assets of the members are shielded from liability for any debts of the business. The law varies from state to state, but most jurisdictions allow an LLC to be established with only one member/owner.

What Is a Subchapter S Corporation?

Technically, Subchapter S status (under the Internal Revenue Code) is a type of tax designation for a corporation, rather than a distinct business form. Revenue of a corporation can be taxed twice, once when the income of the corporation is taxed, and then again when a shareholder’s distributions are taxed as part of their personal income.

By choosing classification as a Subchapter S entity, a business (and its owners) avoid double taxation because there is no tax at the corporate level. The income of the business flows through to the shareholders and is taxed only at their individual income rates. An LLC also can choose to be treated the same as an S corporation for tax purposes.

Only certain corporations are eligible for Subchapter S status:

• Only domestic corporations qualify.
• A Subchapter S corporation may not have more than 100 shareholders.
• Partnerships, corporations, and non-resident aliens may not be shareholders.
• The company may have only one class of stock.
• Certain types of corporations are ineligible, such as insurance companies and financial institutions.

What Are the Similarities Between LLCs and Subchapter S Corporations?

Limited liability companies and corporations both limit the potential liability of shareholders or members (owners). In both instances, owners are generally liable only to the extent of their investment in the business. Personal assets are not accessible to creditors.

In addition, both types of entities have been deemed “pass-through” entities, so that business income is subject to only a single tax.

How Are Subchapter S Corporations Different From Limited Liability Companies?

Most importantly, LLCs offer greater management flexibility. A corporation must have a board of directors and must appoint officers to manage the day-to-day affairs of the business. The owners of a limited liability company don’t need a board of directors but can choose to run the business on their own.

In addition, corporations are subject to more stringent meeting and notice requirements than limited liability companies.

Contact MCIS Law

At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses and business owners throughout southeast Texas, handling all matters related to business formation. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.