Difference in income allocation:
While S-Corporation special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners. An LLC may offer several classes of membership interests, while an S-Corporation may only have one class of stock.
Ownership restrictions:
Any number of individuals or entities may own interest in an LLC. Also, LLCs are allowed to have subsidiaries without restriction. Ownership interest in an S-Corporation is limited to no more than 100 shareholders. On top of that S-Corporations cannot be owned by C-Corporations, other S-Corporations, many trusts, LLCs, partnerships, or non-resident aliens.
Self-Employment Taxes:
One advantage of S-Corporation is the way self employment taxes are calculated. S-Corporation owners employed by the company must receive salary, and their self employment tax is calculated based on that salary (this is true with the exception of S-Corporations based in New York City). Owners of LLC, on the other hand, pay self employment taxes based on all member distributions they receive.
All corporations start as C-Corporations and are required to pay income tax on taxable income. An C-Corporation becomes a S-Corporation by completing and filing federal form 2553 with the IRS.
Taxation:
An S-Corporation's net income or loss is 'passed-through' to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C corporations.
Difference in income allocation:
Subchapter S-Corporations, as they are also called, are restricted to having no more than 100 shareholders, and cannot be owned by C-Corporations, other S-Corporations, many trusts, LLCs, partnerships, or non-resident aliens.