What Is the Difference Between Private & Public LLCs?

A private LLC is owned by a limited group of people not traded publicly.

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A limited liability company, or LLC, is a company that is not a separate entity for tax purposes, such as a partnership or sole proprietorship. In an LLC, profits pass through the company straight to the owners, where they are taxed for the profit and not the company. If the LLC wants to sell shares publicly it must become an S-Corporation LLC in which case the profits pass through the company to the shareholders. The limited liability means owners and shareholders are somewhat protected from liability if the company experiences loss or is sued.

An LLC that is not an S-Corporation is less expensive and less of a hassle to set up. Registration is easier and less expensive because there is less paperwork. With only a few shareholders or owners connected to an LLC, fewer rules are required as to how the company will operate and share profits. When an S-Corp is established, there must be scheduled meetings for shareholders and board members and stricter rules about bylaws, stock transfers and maintaining records.

With an LLC that is not an S-Corp, owners can decide among themselves how to share profits. If one member contributed more time than his partners, the group can decide to give him more of a share, for example. With an S-Corp, outside agencies such as the Internal Revenue Service, keep an eye on whether or not it considers shareholders to be receiving fair compensation. Practices the outside angecy considers questionable may inspire them to audit the company.

With an LLC that is not an S-Corp, members are taxed on the entire taxable income of the LLC, not just the portion they receive. And they pay taxes at the self employment rate, which is higher. With an S-Corp, if you are a shareholder but not an employee, you only pay taxes on the distribution amount and may not have to pay taxes on that, depending on circumstances. Also, you may be able to write off certain expenses as business expenses.

With an LLC that is not an S-Corp, the entire LLC may dissolve when one partner leaves. This is less likely to happen with an S-Corp LLC because the ownership is distributed over more people and the entity can continue without the one partner. There is a clearer line between the organization and it's owners that protects the longevity of the organization.

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