C Corp S Corp LLC Differences: Everything You Need to Know
It can be difficult to navigate the C corp, S corp, LLC differences for new business owners. You will need to know about these different business structures and how they are alike and different from one another so that you choose the option that best fits your needs.3 min read
It can be difficult to navigate the C corp, S corp, LLC differences for new business owners. You will need to know about these different business structures and how they are alike and different from one another so that you choose the option that best fits your needs.
What Is an LLC?
An LLC is a structure that protects your personal assets from any liability from your business. It makes you separate your business and personal finances. LLCs are allowed in every state as well as the District of Columbia. It is a very flexible business structure with regard to management. You have some flexibility with reporting taxes.
LLCs are similar in nature to S corps regarding taxes. Both business income and expenses are dealt with on your own personal taxes. The owner of an LLC is seen as a disregarded entity. That means that you are to report the income and expenses of the LLC on a Schedule C Form 1040, which is also used for sole proprietorships.
An LLC may be an ideal business structure if:
· You stand to suffer from losses for the first two years and you want to pass those through to your own taxes and the taxes of the other members.
· You want some flexibility regarding accounting, as LLCs do not use the accrual method like C corps.
· Your business owns real estate.
· You do not want to deal with organizational formalities, such as director or shareholder meetings. Corporations are required to hold these meetings.
· You do not want to deal with the documentation requirements necessary with corporations.
· You want flexibility regarding paying profits to owners.
An LLC combines parts of a partnerships and corporations. It is an unincorporated structure that will protect company liability. Some startups choose to not form an LLC, particularly with technology startups. They want the opportunity to provide employees and consultants with different options. It is harder to get investors on board with just an LLC, as they cannot provide those options.
The good news is that a startup can convert their LLC to a C corporation. There can be some statutory limits in some states where additional requirements are necessary.
What Is a Corporation (Inc)?
A corporation shields your personal liability from your business liability. You have to separate your own personal finances from those of your business. Corporations are allowed in every U.S. state as well as the District of Columbia. A corporation is more attractive to investors. A corporation is also preferred for IPO. They are recognized outside of the U.S.
When deciding on which type of corporation to use, many owners take into consideration the way it will be taxed, particularly between S corporations and C corporations.
What Is an S Corporation?
Once you decide to create a corporation or LLC, you may choose which way you prefer your business to be taxed. A new corporation, like LLCs using corporate taxation, may opt to file as a C corporation or an S corporation.
An S corporation is a pass-through entity. This means that the business is not taxed by the IRS. The money that is made is instead reported on the owner’s personal taxes. A C corporation is not taxed in this way. Instead, it is taxed at the corporate level. The dividends are then distributed.
You can choose to file as an S corp by filling out a form with the IRS along with your state government. All profits and losses of the business will then pass through the business and on to you so that you can deal with them on your taxes.
S corps are ideal if:
· You want to have the benefits of a corporate business but with pass through taxation.
· You want the ability to set salaries for your employees and yourself to minimize taxes.
· Flexible accounting methods, as corporations must use the accrual method unless they are a small business. S corps do not have to use the accrual method unless inventory is involved.
· Less likelihood of IRS audit, as S corps will file an informational tax return.
If you need help with understanding c corp s corp LLC differences, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.