Explanation of Limited Liability Company – LLC!

December 2nd, 2006


Limited Liability Company (LLC) and S Corporations are similar in few respects. To start with, they are both separate legal entities formed by a state filing. Further, both LLC and S Corporations are pass-through entities from a tax view point (the income tax paid by the owners of the company or corporation has to be in accordance with the profit or loss made by their respective organizations in the previous financial year), and finally, both invariably offers the same extent of limited liability protection to its owners.

But, when it comes to differences, it is a long drawn-out list. To start with, here are few of them – Limited liability corporations have members, while corporations have shareholders. While LLCs are run by managers, corporations are governed by officers. Other major differences are enunciated below.

# The ownership of S Corporation is very much limited, but such a constraint does not exist for limited liability companies. The restrictions imposed by IRS in the this regard include

1)    An LLC can have any number of owners (members) while S Corporation cannot have more than 100 shareholders.
2)    Non-residents of US can be a part of LLCs while such a thing is non-existent in the case of S Corporations.
3)    S Corporations cannot be owned by other C Corporations, many trusts, S Corporations, partnerships or LLCs. Limited liability corporations does not have to confirm to such rules.

# LLCs can have subsidiaries without any limits or restrictions. Such a convenience is not with S Corporations.

# Lots of formalities are embedded in the working structure of corporations. That is, corporations are bound to conduct annual board and shareholders meeting without fail, and its minutes and other records have to be preserved for future references. But, a limited liability corporation (LLC) does not have such obligations, even though it is good only to document the important events taking place in its four walls.

# Limited liability corporations have a certain lifespan while corporations’ life is perpetual. In fact, most states require LLCs to suggest a possible dissolution date in its articles of incorporation itself for the withdrawal or death of a member are sometimes reason enough to dissolve an LLC.

# The ownership or interest of an LLC is not freely transferable while the stock of corporations is not. In the former case, the approval of other members is required so as to affect any transfer of interests.

# Finally, S Corporations have many advantageous in association with self-employment taxation, while LLCs don’t. In other words, S Corporation owners can afford to pay low employment salaries and more in distributions, thus saving hundreds of dollars per year in employment taxes, while limited liability corporations have no choice, but to pay the entire employment taxes on their annual earnings. It is in fact, one of the biggest differences between the two.