LLC - S Corp - C Corp
Which One Is Right for Me?
Business goals aren't one size fits all and neither is incorporating. When deciding which kind of corporation fits your business strategy, consider some of the different benefits that each kind offers. And take a deeper dive with the comparison chart linked below.
What is an LLC?
Simply put, an LLC is the least complex business structure. Unlike an s corp or c corp, the structure of an LLC is flexible. Starting an LLC also gives you the perk of pass-through taxes, limited liability (obviously), and legal protection for your personal assets. Plus the added benefit of looking more legit
than the other guys.
Advantages of Starting an LLC
There are several advantages to creating an LLC, but here are a few that stand out.
- Pass-through taxes. There's no need to file a corporate tax return. LLC owners report their share of profit and loss on their individual tax returns, meaning you avoid double taxation.
- No residency requirement. Those who have an LLC need not be U.S. citizens or permanent residents.
- Legal protection. Creating an LLC gives you limited liability for business debts and obligations.
- Enhanced credibility. Partners, suppliers, and lenders may look more favorably on your business when it's an LLC
Compare LLCs and corporations with our business comparison chartDisadvantages of Starting an LLCCreating an LLC is an attractive option, but there are a few hurdles.
- Limited growth potential. LLC owners cannot issue shares of stock to attract investors.
- Lack of uniformity. An LLC can be treated differently in different states.
- Self-employment tax. LLC earnings can be subject to this kind of taxation.
- Tax recognition on appreciated assets. This could happen if you convert an existing business to an LLC. One more way that extra taxation can occur.
Is Creating an LLC Right for Me?
It depends on your short-term and long-term business goals. We recommend that you think about where your business is now and how you want your business to grow before deciding whether starting an LLC is right for you.
How to Create an LLC (Limited Liability Company): Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do). Draft and file your Articles of Incorporation with your Secretary of State. Decide who will run the business (managers or members). Decide how many owners will be part of the LLC. Apply for a business license and other certificates specific to your industry. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN). Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally, your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN
What is an S Corp?
S Corp Advantages
- Limited liability. Company directors, officers, shareholders, and employees enjoy limited liability protection.
- Pass-through taxation. Owners report their share of profit and loss on their individual tax returns.
- Elimination of double taxation of income. Income is not taxed twice – once as corporate income and again as dividend income.
- Investment opportunities. The company can attract investors through the sale of shares of stock.
- Perpetual existence. The business continues to exist even if the owner leaves or dies.
- Once-a-year tax filing requirement. Versus c corps, which must file quarterly.
S Corp Disadvantages
There's a lot to love, but here are a few things to consider before adding the 's' to your corp.
- U.S. citizens and permanent residents only. Unlike the c corp and LLC (Limited Liability Company), you have to be a legal resident of the U.S.
- Limited ownership. An s corp may not have more than 100 shareholders.
- Formation and ongoing expenses. It is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtaining a registered agent for your company, and paying the appropriate fees. Many states also impose ongoing fees, such as annual reports and/or franchise tax fees.
- Tax qualification obligations. Mistakes regarding the various filing requirements can accidentally result in the termination of s corp status.
- Closer IRS scrutiny. Payments to employees and shareholders could be distributed as either salaries or dividends. Each is taxed differently, which is what leads the IRS to scrutinize that distribution more closely.
S Corporation vs. C Corporation
What is an S Corp?
As we described above, an s corp is something like the lite version of a c corp. That is when you consider its growth potential and organizational structure.
Every business that files for a corporation is first classified as a c corp. Once that's complete, you have to then file for subchapter s corp status and meet all requirements for an s corp – namely, have fewer than 100 shareholders who are all individuals, not corporations; have only one class of stock, and be owned by U.S. citizens or resident aliens. All of these are pretty easy requirements for most small businesses.
Back to the perk of saving money. An s corp is not subject to double taxation as a c corp is. That means that an S Corp's revenue is not taxed at the corporate level. It's only taxed when paid out as salaries or dividends to shareholders. That alone could save an s corp hundreds of thousands of dollars. For this reason, a c corp makes very little sense for a small business. But if you opt for an s corp, make sure you have a solid accountant as one mistake in filing can send your company back to c corp status, leaving it open to be taxed twice.
How to Start and Form an S Corp Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do). Draft and file your Articles of Incorporation with your Secretary of State. Issue stock certificates to the initial shareholders. Apply for a business license and other certificates specific to your industry. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN). Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally, your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN. File the IRS form 2553 within 75 days of your corporation formation.
What is a C Corp?
Advantages of a C Corporation
There are many benefits of a c corp. Below are just a few that stand out.
- Limited liability. This applies to directors, officers, shareholders, and employees.
- Perpetual existence. Even if the owner leaves the company.
- Enhanced credibility. Gain respect among suppliers and lenders.
- Unlimited growth potential. The sky's the limit thanks to the sale of stock.
- No shareholders limit. However, once the company has $10 million in assets and 500 shareholders, it is required to register with the SEC under the Securities Exchange Act of 1934.
- Certain tax advantages. Enjoy tax-deductible business expenses.
Disadvantages of a C Corporation
Having unlimited growth comes with a few minor setbacks.
- Double taxation. It's inevitable as revenue is taxed at the company level and again as shareholder dividends.
- Expensive to start. There are a lot of fees that come with filing the Articles of Incorporation. And corporations pay fees to the state in which they operate.
- Regulations and formalities. C corps experience more government oversight than other companies due to complex tax rules and the protection provided to owners from being responsible for debts, lawsuits, and other financial obligations.
- No deduction of corporate losses. Unlike an s corporation (s corp), shareholders can't deduct losses on their personal tax returns.
C Corporation vs. S CorporationBoth C and S corps offer limited liability protection. Both require Articles of Incorporation to be filed. And both comprise shareholders, directors, and officers. There are lots of similarities, but they differ in the complex realm of taxation and corporate ownership.
As we mentioned above, c corps are subject to double taxation while s corps are pass-through tax entities, allowing them to avoid being taxed at the corporate level and again on shareholders' personal income taxes.
When it comes to corporate ownership, c corps have no restriction on ownership, which goes back to our point about them having unlimited growth potential. But
s corps don't have that luxury as they're restricted to no more than 100 shareholders. Also, s corps cannot be owned by a c corp, other s corps, LLCs, partnerships, or many trusts. But a c corp has no limits on who or what can be a shareholder. Compare corporations and LLCs with our
business comparison chart.
How to Form a C Corporation Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do). Draft and file your Articles of Incorporation with your Secretary of State. Issue stock certificates to the initial shareholders. Apply for a business license and other certificates specific to your industry. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN). Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally, your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.
