C Corportation vs S Corporation vs LLC: Everything You Need to Know
C-corporation vs. S-corporation vs. LLC is a comparison that many entrepreneurs find themselves making when they are deciding which business structure to adopt. 3 min read
2. What Is a C-Corp?
3. What Is an S-Corp?
4. C-Corp vs. S-Corp vs. LLC
C-corporation vs. S-corporation vs. LLC is a comparison that many entrepreneurs find themselves making when they are deciding which business structure to adopt. It is important for a business to choose the right structure because it will determine how it will pay its taxes and how much personal liability protection its owners will receive. All three of these business structures have their pros and cons.
What Is a Limited Liability Company?
A limited liability company (LLC) refers to a business entity that is established under state law and provides personal liability protection for its owners. Similar to an S-corp, an LLC reports its income and expenses on its owners' personal tax returns.
The LLC business structure is a suitable option for business owners that:
- Are anticipating losses for two or more years and wish to pass their losses through to their owners' tax returns
- Wish to use more flexible accounting methods, because LLCs, unlike C-corps, do not have to use accrual accounting
- Own real estate
- Want greater management flexibility, because LLCs have a more relaxed and flexible management structure than corporations
- Wish to have minimal ongoing formalities, because LLCs, unlike corporations, are not required to hold annual meetings and keep meeting minutes and records of major decisions
- Want more flexibility in the sharing of profits among owners
What Is a C-Corp?
A corporation refers to a separate legal entity that is formed under state law and protects its owners' or shareholders' personal assets from creditor action. A C-corp is also known as a regular corporation. It is a separate taxable entity, meaning it pays taxes on its income and expenses instead of passing them through to its owners. However, if its profits are distributed as dividends to its owners, they are reported on the owners' personal tax returns, resulting in double taxation.
A C-corp is the right legal structure for business owners that:
- May require venture capital financing
- Want more profit-sharing flexibility
- Wish to keep earnings in the company to achieve growth
- Want greater flexibility for distributing earnings between the company and the shareholders for better tax planning
- Want more flexibility for setting the salaries of employees and owners to reduce self-employment taxes
- Wish for more flexibility to provide better medical, health, and other fringe benefits
- Wish to be able to sell their businesses more easily
- Expect their businesses to own real estate
- Want to reduce their risk of IRS audit
What Is an S-Corp?
An S-corp has the same structure as a C-corp, consisting of shareholders, directors, and executive officers. It also protects its shareholders from being responsible for its debts and liabilities. In addition, it has the same compliance and documentation requirements as a C-corp, such as filing articles of incorporation, issuing stock, paying certain fees, holding shareholder meetings, and others. However, unlike a C-corp, an S-corp is regarded as a pass-through entity, meaning it does not have to pay taxes but passes taxes on its income through to its owners.
An S-corp is a good option for business owners that:
- Want to avail of the benefits of the corporate business structure while enjoying pass-through taxation
- Wish for greater accounting flexibility, since S-corps do not have to use accrual accounting if they do not have inventory
- Want to have more flexibility for setting the salaries of employees and owners to minimize self-employment taxes
- Wish to reduce risk of IRS audit
C-Corp vs. S-Corp vs. LLC
LLCs, C-corps, and S-corps all provide personal liability protection for their owners. LLCs and S-corps are the preferred business structures for small businesses. Both of them allow their owners to add new owners and grow their businesses more easily. They also pass their incomes through to their owners' personal tax returns. However, they differ in the way their owners pay employment taxes. In an S-corp, shareholders pay employment taxes on their salaries but do not have to pay taxes on the distributions they receive.
- Liability protection
- Some tax advantages, such as deductions that are not available to sole proprietorships
- Ability to raise capital more easily
- Greater opportunity for gaining credibility
If you need help with choosing between C-corp, S-corp, and LLC business structure, 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.