LLC S Corp C Corp: Everything You Need to Know
Whether choosing an LLC, S Corp, C Corp, or some combination of these business entity structures for your business, you'll want to understand the advantages and disadvantages of each and how they work. 3 min read
Whether choosing an LLC, S Corp, C Corp, or some combination of these business entity structures for your business, you'll want to understand the advantages and disadvantages of each and how they work.
LLCs and Corporations
Corporations and limited liability companies (LLC) both provide a level of liability protection to the owners or shareholders of the business. They protect the personal assets of company members from creditors and others if the business faces financial or legal trouble. All of the personal finances and business finances are kept separate with LLCs and corporations. Both of these entity types are considered legal throughout the United States.
LLCs enjoy more flexibility than corporations when it comes to their management structures and reporting taxes.
Corporations are better options for companies looking for outside investors and stock market action, plus they are internationally recognized entities.
What Is an S Corp?
A single-member LLC can opt to be viewed as corporation or sole proprietorship by the Internal Revenue Service (IRS) for taxation. If the LLC takes on the sole proprietorship or partnership classification, the members (or owners) of the business are required to report the company's income on their personal tax returns.
Multi-member LLCs can be treated as corporations or partnerships. If an LLC chooses to be taxed as a corporation, they can choose either S Corp or C Corp status.
S Corps are pass-through business entities, meaning that the profits and losses of the company pass through the to its owners and are therefore only taxed once on the personal income tax returns of the owners. C Corps are not treated as pass-through entities.
C Corps and S Corps
Owners of LLCs that choose either C Corp or S Corp status will still be required to report the company profits and losses on their personal tax returns. But a C Corp will also be taxed on its business income, so the profits of the company are taxed twice.
S Corps are not allowed to have over 100 members or shareholders, and all of these individuals have to be citizens of the United States or resident aliens and not other business entities.
Forming a C Corp, S Corp, or LLC
The LLC business structure itself has no effect on how a business entity is taxed. When it comes to taxation practices, an LLC is either a sole proprietorship, partnership, or corporation. LLCs do not have their own tax identity.
Whether a business owner is looking to form an LLC, S Corp, or C Corp, they will need to file formation documents with the Secretary of State office in the state where they plan to conduct business. Corporations file articles of incorporation and LLCs file articles of organization.
When an LLC chooses to incorporate, they are automatically classified as a C Corporation (C Corp).
C Corps are taxed as their own business entities, so the profits and losses of the company are taxed through the business itself, not its owners.
However, any dividends or profits distributed to the shareholders or owners of the company are also taxed on the individual income tax returns of the recipients. This means that the company's income is taxed twice.
For this reason, business owners don't usually choose the C Corp structure for smaller companies.
You might choose the C Corp structure for your business if:
- You need outside investors (non-member investors).
- You want owners to have flexibility when it comes to sharing profits.
- You hope to grow a larger company.
- You want flexibility in your profit distributions for better tax-planning.
- You want to be able to offer large health, medical, and fringe benefits to owners and employees.
- You want the company to be able to own property.
- You want to have the option to offer employees stock options.
If you've incorporated your LLC, you might decide to opt for S Corp status if you want to benefit from a pass-through entity structure while also enjoying the benefits of a corporate structure.
LLCs can also choose to remain unincorporated and treated as a disregarded entity for taxation purposes. The assets of LLC members are protected from liability with the LLC structure just like with corporations, but they don't have as many options for larger company growth and stock.
If you need help with an LLC, S Corp, or C Corp, 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.