The Key Differences Between an LLC and an S Corp In Wyoming

Wyoming has seen a recent economic uptick as it continues to recover from the impact of the pandemic. It remains a strong state for business and it has been able to reduce its unemployment rate from 4.2% in September of 2021 to 3.7% in February of 2022 according to the US Department of Labor. When considering starting a business in Wyoming it is important to know which business type will best suit your needs. The two most common types for a small business are LLCs and S corporations. 

LLC and S Corporations

A Limited Liability Company (LLC) and an S-corporation both have certain similarities to one another. They both provide limited liability asset protection and they both provide pass through taxation which means that the owner only has to pay tax on their income, so the company does not have to pay income tax. Limited liability protection means that the assets of the business are protected from liability from the owner and the owners assets are protected from liability from the business.

An S corporation is not actually a business entity in and of itself, rather it is a status for tax purposes developed by the Internal Revenue Service (IRS). In contrast to this, LLCs are one of the types of business entities which are created by state law. A unique feature of LLCs is that its members may elect to be taxed as an S corporation. 

Differences and Similarities

An S corporation is required to follow guidelines while forming and running the business. These guidelines include: the scheduling of at least one annual meeting for shareholders which includes the taking of minutes at this meeting, the creation and following of company bylaws, the keeping of accurate financial records and the issuing of stock to each individual shareholder. An LLC is not required to to follow any of these formal guidelines. However, the IRS strongly recommends that members of an LLC: should create and follow the rules of an operating agreement, maintain documentation of all substantial financial decision making and hold at least one annual meeting for members of the LLC.

S corporations are made up of shareholders who all have an economic interest in the success of the business. S corporations are limited by the IRS in that they are not allowed to have more than 100 shareholders and all of these shareholders must be American citizens. In contrast to this, an LLC can have an unlimited number of owners. The owners, who are also called members, can decide whether they will have active managerial involvement in the company or whether they will have no managerial involvement in the company. The owners of an LLC are also not restricted as to what type of entity they have to be. An LLC can be owned by another LLC whereas an LLC cannot be a shareholder in a corporation. The distribution of profits also changes in an LLC as the owner can decide the manner in which profits are distributed even if this does not align with ownership share. Whereas the profits of a corporation are distributed according to the percentage of the company which the shareholder owns.

An S corporation benefits from a greater degree of permanence than an LLC. A corporation will continue operation despite a shareholder leaving or selling their shares. Whereas an LLC will dissolve if a member of the business leaves the company. This is why it is very important to carefully build your LLC with the right people to ensure that this is not a problem later in the company’s life. It is also far easier to transfer ownership in an S corporation as shares can be bought and sold. This makes it easier to redistribute ownership as well as not be forced to end the business prematurely. There are also no significant tax implications for redistributing ownership of an S corporation.

The benefits which an LLC and an S corporation share are twofold. Firstly both structures provide limited liability asset protection. As mentioned in the introduction, this provides a shield for the owners to be held liable in a personal capacity if the company were to go into debt or bankruptcy. This is because the business and the individual are two separate legal entities. The result of this is that creditors are unable to access the personal assets of the owners in any way. Secondly, both structures allow for what is known as pass-through taxation. C corporations are the standard type of corporate structure and they are subject to a form of double taxation. The corporation is liable for tax on the income it generates and the shareholders are liable for tax on the income which they receive from dividends. Pass-through taxation means that the income which is generated by the company passes through the company directly to the owners and then this income is only taxed as personal income. This means that the business does not have to file an income tax return with the IRS, only the owners who reaped the benefits need to file for income tax. An advantage of establishing a business in Wyoming is that there is no state income tax.  

Which entity will best suit which business is a decision to make on a case-by-case basis as each has different pros and cons? Consider an LLC if you would like to: maintain simple and straightforward compliance and administration, entice foreign investors or have foreign owners in your company, have simpler tax returns and less fees for accounting work, and if your business does not need to sell equity for financing purposes. Consider an S corporation if you have the following requirements: all of the business’s owners are American citizens or permanent residents, you need to sell shares in the business to generate financing, your business can handle the increased administrative tasks to maintain compliance, the owners of the business accept the greater degree of complexity with regards to tax returns and the higher accounting fees which this will entail. For more information regarding the differences between these two business types consider this resource

Final Thoughts

There are many similarities and differences between an LLC and an S corporation. The primary overlaps in functionality are the provision of limited liability asset protection and the ability to practice pass-through taxation. The differences arise when considering the relative administrative work required to keep each type of company compliant as well as the differences in the nature of the owners. An LLC has more relaxed requirements with regards to ownership and also allows flexibility in the payout of dividends but the company will terminate if a member leaves. While an S corporation has more stringent requirements for owners and distributes dividends according to ownership it allows for easier transitions of ownership and does not terminate if a shareholder leaves the business.