It is important to know the significant differences between a Limited Liability Company (“LLC”) and a Subchapter S Corporation in California (“S-Corp”). This posting addresses a few of those differences.
Both an LLC and an S Corp. provide limited liability to their owners. Both are subject to a piercing of the “veil” of limited liability if the separateness of the entity is not respected.
An LLC can be set up to operate like a partnership with considerable flexibility as to distributions, rights of members (owners) of the LLC. Accounting and tax treatment of an LLC is similar to a partnership including but not limited to members capital accounts. An LLC if it so elects is a pass through entity for tax purposes. An LLC has a less formal standard for appropriate governance than an S Corp.
An S Corp has a more ridged governing structure. It must have a board of directors and officers. The formal meeting requirements are higher than an LLC. An S Corp is only allowed one class of stockholders so differing distribution rights cannot be set up among the shareholders. The accounting more is on a corporate not partnership basis. There are no capital accounts for shareholders; however each has a basis in his or her stock. An S Corp. is a tax pass through entity. Ownership of an S Corp is generally limited to US tax payers.
While both an LLC and an S Corp are pass through entities, taxation can be different depending on which entity one selects. Tax treatment of an LLC will in part be influenced by capital accounts and changes therein, while an S Corp the pass through will be treated on a corporate distribution basis. We recommend that clients review this issue with their tax advisors in detail.
Any time you intend to operate a business we recommend that you first consult with an attorney and your tax professionals to address the legal and tax ramification of your business’ structure. In the event you have any questions about forming a new entity, or making sure your current entity is in compliance with California law, please visit our website at www.shbllp.com, or call Shulman Bastian Friedman & Bui LLP to meet or speak with one of our business lawyers (949-340-3400).