LLC S Corp Or C Corp: Everything You Need to Know
LLC, S corp, or C corp are a few of your options when starting a new business it is important to select the correct business structure. So, first you need to know the differences. Each type has advantages and disadvantages.3 min read
2. Implications of Incorporating
3. Information on C Corporations
4. Information on S Corporations
5. Information About LLCs
LLC, S corp, or C corp are a few of your options when starting a new business it is important to select the correct business structure. So, first you need to know the differences. Each type has advantages and disadvantages.
Filing a DBA
Below are some key things to note about filing a DBA:
- Filing a DBA allows you to do business in a name other than your own.
- You usually file it with the county, sometimes with the county tax assessor's office.
- Partnerships and sole-proprietorships have to use their personal name if they do not file a DBA.
- A DBA offers no liability protection.
Implications of Incorporating
Your corporation or LLC provides partial protection to the directors, officers, and stockholders of a company. On the flip side, if you are personally sued, the LLC or corporation may have protection. Other implications include:
- Conversion: Each state is different, but most states allow for corporations to convert to a different entity type.
- Taxation: Individuals are usually taxed at higher rates than corporations.
- Ownership transfers: LLC and corporation ownership interest is easily transferable.
- Credit rating: Each corporation has a credit rating totally separate from the owner(s).
- Employee incentives: Incentive stock can be issued to employees as compensation for tenure and work completed.
- Duration: Both corporations and LLCs have the ability to go on indefinitely, as long as they follow state, county, and federal laws.
- Raising Capital: Corporations have the ability of raising capital through stock sales and convertible debt issuance.
Information on C Corporations
A C corporation is a general corporation, and C corporation and corporation are used interchangeably. Your company is automatically a C corp when you form it. Incorporating makes the business a separate entity. When corporate profits or dividends are issued, the owners are responsible for paying personal taxes on the money they receive.
If the following apply to you, you may want to form a C corporation:
- You want to use venture capital financing.
- You want the owners to have flexibility with profit shares; you want to keep your earnings in the business.
- You want business earnings flexibility.
- You would like to provide employees with fringe benefits, like health care.
- You want the ability to easily sell the company.
- You want to issue employee accounts for travel and entertainment.
- You want to offer employees stock options.
- Your company will own property.
- You wish to lower your tax audit risk.
Information on S Corporations
Regardless of what entity type your business is, you have to file IRS Form 2553 in order to elect S Corporation status. The requirements of Form 2553 are a bit difficult to follow, but you must turn it in following the guidelines below determine what tax year it applies to:
- Before the 15th of March, election may be made for the current year.
- Anytime the year before you want to be taxed as an S corporation.
- If you turn it in after the 15th of March, it applies to the next tax year.
In some states, you also have to file for S corporation on the state-level after you form your corporation. Taxation is the biggest difference between S and C corporations. The only taxation for S corporations is at the shareholder level. The S corporation may be right for you if:
- You wish to receive the benefits of a corporation and retain pass-through taxation benefits, too.
- You want to lower Social Security and Medicare taxes and offer flexible salaries for your employees.
- You are looking for flexible accounting options.
- You wish to lower your audit risk.
Information About LLCs
Forming an LLC gives you the best of both worlds. You receive the limited liability protection as well as pass-through tax benefits. Business expenses and income are included on your personal Form 1040. The LLC is probably the right structure for you if:
- You think you will have losses for the first two years.
- You want flexibility with accounting. You want management structure flexibility.
- Your business will own property.
- You want to minimize the requirements you must adhere to.
- You want flexible profit and loss sharing among members.
With all of the different benefits and liabilities of each type of corporation, it is a good idea to consult a professional who can help you understand how to maximize the benefits and decrease your liability. 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.