LLC S Corp Vs C Corp: Everything You Need to Know
LLC, S Corp, and C Corp are all different types of business entities. When you are forming a company, you need to know which is right for you. So, below there is a guide that tells you everything you need to know before making this big decision. 3 min read
LLC, S Corp, and C Corp are all different types of business entities. When you are forming a company, you need to know which is right for you. So, below there is a guide that tells you everything you need to know before making this big decision.
Which is Right for Me?
You need to know how C corps and S corps differ from LLCs and how they differ from each other. There is another option, too. You can operate as a sole proprietorship or a partnership by filing a DBA or a fictitious name. So, here are some key things to consider when you are forming your business.
Filing a DBA
Filing a DBA allows you to conduct your business under a name other than your personal name. You usually file a DBA in your county. Sometimes, at your county tax accessor's office, and other states you file with the state, often with the Secretary of State (SOS) or an office created by your state's SOS. You are required to use your name unless you file a D.B.A.
For example, if you are a freelance graphic designer, you have to do business in your name. You are not allowed to conduct your business as Sherman Clark Designs. You have to conduct your business as Sherman Clark. You do not have as many requirements when you file a DBA instead of a corporation or LLC. However, it offers no protection.
Likewise, a D.B.A. does not change the name of the LLC or corporation. It does allow a business to use a different name in trade. The business then has the choice of using the DBA of the entity name.
Forming a Limited Liability Company, an S Corporation, or a C Corp
For LLCs, you file Articles of Organization, and for either type of corporation, you file Articles of Formation with the state. Incorporating or forming an LLC protects you because it creates a completely separate business entity for the business to be conducted under. Both are okay, but each has different pros and cons.
However, you should be aware that using a DBA makes you responsible for all profits, losses, and liabilities of the business. So, if your company is sued, the plaintiff is suing you personally.
Forming an LLC
An LLC is a business entity that gives you liability protection. You form an LLC by filing documents with the state. The LLC does not give you any specific tax benefits. Unless you have multiple owners who elect to be taxed as a corporation, there is no difference between a sole proprietorship or general partnership.
It gives you the protection of a corporation, but you still pay taxes personally on all income from the business. LLCs with one owner are "disregarded entities. The downside is that you may have to pay more taxes to the state as an LLC. Some states even charge income tax and franchise tax.
When You Might Want to Form an LLC
You might want to form an LLC when:
- You are a startup who anticipates losses for two or more years. You want to pass the losses to yourself and/or other owners
- You want flexibility when it comes to accounting methods, as LLCs do not have to pay taxes on the accrual method, which C corps are responsible for paying.
- You invest in real estate.
- You need flexibility in your management structure.
- You want to bypass strict operational requirements placed on corporations so that you are not required to have annual meetings and complete meeting minutes.
- You and the other owners want to be able to flexibly share profits and losses.
Forming a C Corporation
Unlike the other ways of conducting business when you do so as a C corporation, the corporation is taxed on all income. This is different because other types pass the income and losses to the owner(s) so they pay them personally with their personal taxes. A C corp is the default or standard corporation. In the United States, the C corporation is the most commonly formed corporation.
Forming an S Corporation
S Corporations are a bit more complicated. There are tax benefits for filing an S corporation. However, the laws governing S corporations are confusing and at times difficult to navigate. For example, before you may distribute the profits, you have to pay all owners who are employees a reasonable salary. And, you are not required to pay self-employment tax on profits from S corps.
If you need help with choosing which entity to form, 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.