There are many differences between a LLC and a S Corp, even though at first glance they appear to be essentially the same.
First, let’s tackle the issue of forming a LLC versus a corporation, in general. The LLC is generally a lot easier to form. Usually it only requires registration from the state. To make things formal, you should have what’s known as an operating agreement amongst the owners. That’s it. With a corporation, you also have to register with the state, but you have a lot of busy work to do. You have to adopt a charter, adopt bylaws, appoint a board of directors, pass resolutions, etc.
Both a LLC and a Corporation will most probably have to do annual filings with the secretary of the state in which they are formed. Some states, like Missouri do not require that for a LLC.
Now, what is the difference between a LLC and a S Corp? Easy. The S corp has one set of rules for its taxation. Very rigid rules. Very mechanical in application. Some of the other respondents have pointed out that S corps must pay their owner/officers reasonable compensation. The balance of the income can be distributed with no self-employment tax liability ( which makes S corps a big favorite among small business owners). If the S corp has a loss, that will also be distributed to the owners, for their tax advantage.
Now, let’s look at a LLC. LLC’s are tax chameleons. They get to elect how they will be taxed. The default is partnership taxation, or if there is only one owner, a disregarded entity, which means that if you are running a sole proprietor business as a LLC, you’ll file a Schedule C. If you have multiple owners, you’ll file a partnership return. LLC’s can elect to be taxed as S corporations, in which case, there is no difference between a LLC and a S Corp for tax purposes. LLC’s can also elect to be taxed as C Corps, in which case they adopt all of the tax attributes of a C Corp, and pay their own taxes.
Finally, we have to touch on the difference between Partnership taxation, which the LLC default, and S Corp taxation. That’s a big, complex area. At first glance it looks like it would be the same, because S Corps and Partnerships are pass-through entities, meaning that the income flows through to be taxed on the owners’ tax returns. That’s the end of the similarities. There are many differences between S Corps and Partnerships. For S Corps, making a contribution of property to the Corp is governed by Sec 351, which can result in a gain or loss if not handled properly. Partnerships have a much different set of rules. Distributions under a S Corp must be proportionate to the ownership, not so in a partnership. In a partnership there is a fuzzy area of law regarding which distributions are subject to self-employment tax and which are not.
The differences between S Corp Taxation and Partnership taxation could fill many pages of discussion: suffice it to say that the differences are in the little things … which in taxation can sometimes bite you badly when you aren’t aware of them.
In choosing which entity to form, you should have the advice of a competent professional. See a CPA and attorney.