When trying to decide between forming an LLC or an S-Corporation, it is important to know the differences in how the companies are owned and managed. The terms used for each type of company are more than just colloquial differences—a stock certificate is different than a share certificate. Here’s what you should know about these discrepancies:
Shareholders vs. Members
A shareholder is someone (or a group of people or company) who owns at least one share of a company’s stock. S-Corporations have shareholders with stock certificates, while LLCs have members with share certificates. Members, (which can be one or more persons, a corporation, or LLC) rather than owning a specific number of shares, own a specific percentage of the company. An important limitation for S-Corporations is that they can have a maximum of 100 shareholders, and all shareholders must be legal U.S. citizens. LLCs do not have these limitations.
Rights and Transfer of Shares
Shareholders can easily transfer their stock to another shareholder, while the process for LLC members can be slightly more complicated. S-Corp shareholders are able to attend meetings, vote on corporate matters, serve on the board of directors, and sue officers and directors for things such as fraud or misrepresentation. Members, if part of a member-managed LLC, can participate in the management of the LLC in the same ways. This usually happens when there is a small number of members. However, if the LLC is manager-managed, this job is done by a Board of Managers.
Board of Directors vs. Board of Managers
S-Corporations are managed by a Board of Directors, which are elected by shareholders. The Board of Directors then appoints the CEO. In manager-managed LLCs, the Board of Managers can be voted upon or self-appointed—something decided in the company bylaws.
Similarities
Of course, S-Corporations and LLCs have many things in common. Both forms of business give owners liability protection, and both are only taxed at the personal level (instead of at both the corporate and personal level). LLCs require less red tape and are cheaper to set up, so an LLC could be a good choice if you’re a new business owner. However, fast-growing businesses looking for investors could benefit from incorporating as an S-Corporation. Looking at the nuances in management can help you decide which form of business is right for you.