The Basic Differences Between an LLC and an S-Corp
Both an LLC and an S-Corp are pass-through entities for federal income tax purposes — profits and losses flow through to the owners’ personal returns. Neither pays corporate-level income tax. The difference is in structure and restrictions.
A Georgia LLC is governed by the Georgia LLC Act (O.C.G.A. § 14-11-100 et seq.). Ownership is divided into membership interests. Owners are members. Management can be member-managed or manager-managed. There are no restrictions on who can be a member — individuals, corporations, partnerships, trusts, and foreign nationals can all hold LLC interests.
An S-Corporation is a state-law corporation that has elected S status with the IRS. Ownership is divided into shares of stock. The S election is made under IRC § 1362 and maintained as long as the corporation stays within the eligibility rules under IRC § 1361(b)(1). Those rules restrict who can hold S-Corp stock — and the restrictions directly affect estate planning.
S-Corp Shareholder Restrictions and What They Mean for Estate Planning
Under IRC § 1361(b)(1), an S-Corp may not have more than 100 shareholders. All shareholders must be individuals, certain estates, or certain qualifying trusts. The following cannot hold S-Corp stock without terminating the election:
Corporations — including the S-Corp itself in some redemption structures. If a buy-sell agreement uses an entity redemption structure, the shares are redeemed and canceled — they never pass to the corporation as a shareholder. But if shares inadvertently vest in a corporate entity, the election terminates.
Partnerships — a membership interest in an LLC or a partnership interest cannot hold S-Corp stock. If an owner’s estate plan routes shares through a Family Limited Partnership or a multi-member LLC holding company, the S election terminates the moment that entity acquires the shares.
Most trusts — only four types of trusts qualify as S-Corp shareholders: Qualified Subchapter S Trusts (QSSTs), Electing Small Business Trusts (ESBTs), grantor trusts (including revocable living trusts during the grantor’s life), and testamentary trusts (for a two-year window only after the grantor’s death). If a revocable trust becomes irrevocable at death and is not immediately converted to a QSST or ESBT, the S election can terminate.
Nonresident aliens — if shares pass to a foreign national beneficiary, the S election terminates on the date that person acquires the stock.
An LLC has none of these restrictions. Any person, entity, or trust can hold an LLC membership interest without affecting the entity’s tax classification.
How Ownership Transfers at Death — LLC vs. S-Corp
When an LLC member dies in Georgia, their membership interest passes according to their estate plan — into a revocable trust, to named beneficiaries, or through the Georgia probate process if no plan exists. The operating agreement governs who receives the interest and what rights they have. There is no federal eligibility check on the new owner.
When an S-Corp shareholder dies, the shares pass into the deceased owner’s estate. The estate is a qualifying shareholder — but only temporarily. The estate must distribute the shares to qualifying beneficiaries within a reasonable period. If shares pass into a trust that does not qualify — a standard irrevocable trust, a blind trust, a foreign trust — the S election terminates on the date the trust acquires the shares.
The practical consequence: if an S-Corp owner’s revocable trust does not include a QSST or ESBT election, or if the attorney who drafted the trust did not address S-Corp eligibility, the shares can trigger a termination at death. The business loses its pass-through tax treatment retroactively to the first day of the tax year, which can trigger a built-in gains tax and years of amended returns.
For S-Corp owners, the trust documents, the operating documents, and the buy-sell agreement must all address eligibility. An LLC owner’s revocable trust does not need any of these provisions.
The One-Class-of-Stock Rule and Buy-Sell Agreements
Under IRC § 1361(b)(1)(D), an S-Corp can only have one class of stock. All shares must have identical distribution and liquidation rights. A buy-sell agreement that creates disproportionate rights among shareholders can inadvertently create a second class of stock.
The IRS has been clear that buy-sell agreements do not create a second class of stock as long as the purchase price reflects fair market value or a formula that approximates it — and the agreement’s terms are not manifestly unreasonable compared to what unrelated parties would agree to. A fixed price that diverges significantly from fair market value can be scrutinized as creating differential rights.
This is one reason why buy-sell agreements for S-Corps require more careful drafting than those for LLCs. An LLC can have multiple classes of membership interest with different economic rights without any restriction. An S-Corp cannot. For a full comparison of buy-sell agreement structures and the S-Corp restrictions they must navigate, see Cross-Purchase vs. Entity Redemption Buy-Sell Agreements in Georgia.
The Self-Employment Tax Difference — and Why It Matters for Planning
An LLC member who is active in the business pays self-employment tax (15.3% on the first $168,600, 2.9% above that) on their full share of net income. An S-Corp owner-employee pays SE tax only on their W-2 salary — distributions above the salary are not subject to SE tax.
For a profitable business, this creates a real tax savings. A Georgia business owner earning $300,000 in net profit through an LLC pays SE tax on the full amount. The same owner with an S-Corp pays SE tax on a reasonable salary (often $80,000–$120,000) and takes the rest as a distribution — saving $10,000–$25,000 in SE tax per year depending on the salary structure.
That tax savings comes with an ongoing compliance cost: S-Corp owners must run payroll, file quarterly 941s, maintain corporate formalities, and keep minutes. For some businesses, the savings justify the overhead. For others — particularly those with lower net income or multiple owners with complex succession needs — the estate planning flexibility of an LLC outweighs the SE tax advantage.
Valuation Discounts for Estate Tax — Which Entity Works Better
Both LLCs and S-Corps can qualify for valuation discounts when the ownership interest is transferred for estate or gift tax purposes. A minority interest or a non-marketable interest is worth less than a proportional share of the underlying assets — and the IRS accepts reasonable discounts for both entity types.
However, Family Limited Partnerships (FLPs) and Family LLCs are specifically purpose-built for this strategy. They allow a business owner to transfer interests to family members at a discount while retaining management control. The structure works because an LLC can have multiple classes of interests — a management class (held by the parent) and an economic interest class (transferred to children). An S-Corp cannot replicate this structure without violating the one-class-of-stock rule.
For Georgia business owners with estates above the federal exemption ($13.61 million in 2024, indexed for inflation), this distinction matters. If the business is the primary asset and the owner wants to use valuation discounts to reduce estate tax exposure, an LLC is the more flexible vehicle. The S-Corp’s one-class-of-stock restriction limits the structures available for discount planning.
Which Entity Fits Which Situation
LLC is the better choice when: the owner wants maximum flexibility for trust transfers, the business has or will have multiple owners with complex succession needs, the estate plan involves a Family LLC or valuation discount strategy, or the owner’s trust was not specifically drafted to address S-Corp eligibility.
S-Corp is the better choice when: the owner is a solo operator or has a simple two-owner structure with clear succession, the SE tax savings are material (net income above $150,000–$200,000), all co-owners and their estate plans have been reviewed by an attorney for S eligibility compliance, and the buy-sell agreement was drafted to avoid the one-class-of-stock rule.
Many Georgia business owners already have an S-Corp and are not in a position to convert. In that case, the goal is to audit the estate plan, trust documents, and buy-sell agreement for compliance — not to recommend conversion. At The Hive Law, a business succession planning review covers the operating agreement, entity structure, and trust eligibility together as a single package. See the business succession planning service page for details, or the succession planning pricing page for flat-fee costs.
