Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.

Because protecting personal assets from liability is an important consideration when starting a new business, many self-employed real estate investors organize their companies as a type of corporation or limited liability company (LLC). Two common choices among small business owners are S corps and series LLCs.

I help my clients set these up to protect their assets, plan their estates, and help avoid paying unnecessary taxes. While your unique situation may call for a customized approach, I’ve put together this quick guide to help you decide whether an S corp or series LLC is the best business structure for your new venture.

S Corporations and Series LLCs: What Are the Differences?

While there are many similarities between S corps and series LLCs, there are some critical differences between the two options.

Tax Status vs. Entity Type

The S corporation, or S corp for short, is not a type of legal entity but a tax status that the IRS can grant a corporation. On the other hand, series LLCs are a type of business entity created by state law.

Fun side note: LLCs can also choose for the IRS to tax them as S corporations. For this guide, I decided to focus on corporations with S corp tax status.

Shareholders vs. Members

Since S corps are corporations, they are owned by shareholders, whereas series LLC owners are called members. The IRS places the following restrictions on S corporation ownership:

An S corporation cannot have more than 100 shareholders.
S corp shareholders must be U.S. citizens or residents.
An S corp cannot be owned by LLCs, corporations, partnerships, or many types of trusts.

Conversely, series LLCs can be owned by an unlimited number of members and can have unlimited subsidiaries and series.

Board of Directors vs. Managers

As corporations, S corps must be managed by a board of directors and officers. With a series LLC, the owners can manage the company themselves or hire someone else to run the business.

Required Formal Process vs. No Required Formal Processes

Like all corporations, an S Corp must abide by statutorily-required formalities to maintain its corporate status. Examples of common corporate formalities include:

Creating and following bylaws
Issuing stock or shares
Holding at least one shareholders’ meeting each year
Taking minutes
Keeping accurate records

A series LLC and its series are not required by law to follow these types of formalities. However, the IRS does recommend that LLCs follow an operating agreement, hold annual meetings, and document all significant decisions.

S Corps and Series LLCs: What Are the Benefits?

While S corporations and series LLCs have their differences, they can offer similar benefits to real estate investors.

Liability Protection

Both S corps and series LLCs offer their owners protection from personal liability for the business’ debts. Corporations and LLCs are considered separate legal entities from their owners. This means that the business’s creditors cannot go after the owner’s personal assets to pay company debts.

With a series LLC, you also enjoy asset protection between series. A creditor cannot access the property of one series to pay the debts of the other.

Pass-Through Taxation

Standard corporations, which are also called C corporations or C corps, are subject to double taxation. The corporation pays income tax on the profits, and then shareholders must also pay income taxes on the dividends they receive.

Both S corps and series LLCs are pass-through tax entities. This means that the company does not have to pay corporate income tax, but its profits or losses are “passed-through” and recorded as the owners’ personal income. With pass-through entities, income taxes are paid by shareholders or the LLC members on their individual tax returns, not by the business.

S Corps vs. Series LLC: What You Need to Know

Unfortunately, the answer to this question is not black and white. Deciding between forming your new business as an S corp or a series LLC can be confusing, especially when both options offer similar benefits. The choice is ultimately a personal one and will usually hinge on how you want your business to function. There will always be pros and cons to any decision, so make sure you take your time and consult with an attorney if you need help.

Questions? Comments?

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