LLCs and S-corps are both created under state laws and must comply with state requirements. While similar from state to state, there are variations in requirements and regulations. The two structures share specific characteristics but differ in others. For example, an LLC is a legal entity, while an S-corporation is a tax election status. Owners of an LLC are referred to as “members” while owners of an S-corporation are “shareholders”.
Creating an LLC or an S-corporation requires filing certain documents in the State of domicile, the designation of a registered agent, and payments of applicable fees. LLC filings include copies of its Article of Organization and Operating Agreement according to the regulations of the State. S-corporation filings include its Articles of Corporation, Bylaws, and the names of Directors and corporate officers. Founders must also file Form 2553 with the IRS to receive Subchapter S corporate status with pass-through taxation.
In most states, LLCs are the least cumbersome to set up and manage since many do not require the filing of an Operating Agreement. An LLC is particularly suited for a single-owner or family partnership seeking management flexibility and minimal documentation and filings.
An S-corporation begins as a C-corporation whose shareholders make an IRS election to qualify for S-corporation status. They are more expensive to establish and manage but offer greater flexibility in future financings. Owners of larger, more complex businesses or anticipating a need for future rounds of equity investment and a future public offering are generally better served with the S-corporation structure.