LLC vs S Corp vs C Corp: Key Differences Explained

Key Takeaways

• Ownership & Structure: LLCs offer flexibility and limited liability, S Corps limit ownership to 100 U.S. shareholders, and C Corps allow unlimited shareholders.
• Taxation: LLCs and S Corps are pass-through entities, while C Corps face double taxation (corporate and personal).
• Management: LLCs can be member- or manager-managed; corporations require a formal board of directors and officers.
• Best For: LLCs suit small businesses; S Corps fit growing businesses avoiding double taxation; C Corps are ideal for startups seeking investors.
• Liability Protection: All three structures provide strong protection against personal liability for business debts.

When starting up a business, it is practical if the owner knows the difference between an LLC vs S Corp vs C Corp. There are advantages and disadvantages of each business structure. There are features of each that are similar to each other, and other features that distinguish them.

What is an LLC?

An LLC, or “limited liability company,” shields the personal assets of the owners, or members, from any of the business’s creditors. It can be thought of as a combination between a partnership and a corporation. Essentially, it provides protection from personal liability against any of the LLC’s financial debts or legal liabilities. This type of business structure is regulated under state law, and every state, including Washington, D.C., allow businesses to form as an LLC. Under state law, an LLC is a separate, distinct legal entity from its owners, and the finances must be kept separate.

LLCs are an attractive option to business owners because they provide a lot of flexibility in forming and maintaining a business. It also provides flexibility for tax purposes. For instance, if an LLC is owned by a single person, it can choose to be taxed either as a sole proprietorship or a corporation. For a multiple-owner LLC, it can choose to be taxed like a partnership or a corporation. An LLC that elects to be treated like a sole proprietorship or partnership will pass through the taxes on its income to the owners’ personal tax returns. However, if taxed this way, the owners will be required to pay self-employment taxes on their entire income, whereas this is avoided if taxed like a corporation.

Advantages and Disadvantages of an LLC

An LLC provides the simplicity of a partnership with the liability protection of a corporation. One of the biggest advantages is flexible taxation — members can elect to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on what’s most advantageous for the business. Additionally, LLCs face fewer administrative requirements than corporations — no formal meetings, minutes, or bylaws are required in most states.

Advantages of an LLC include:

• Pass-through taxation (avoiding corporate-level taxes).
• Flexible ownership and management structure.
• Limited liability protection for all members.
• Easy to form and maintain compared to corporations.

Disadvantages include:

• Self-employment taxes on all profits (unless taxed as an S Corp).
• May be less attractive to investors due to lack of stock issuance.
• Varies by state in terms of annual fees and compliance requirements.

LLCs are best suited for small to mid-sized businesses and freelancers who want liability protection without heavy compliance obligations.

What is a C Corporation?

Similar to an LLC, a C corporation provides its owners, or shareholders, with personal liability protection. This means that the shareholders’ personal assets are unreachable by the corporation’s creditors. However, unlike an LLC, a corporation is very attractive to outside investors.

C corporations are not considered “pass-through” entities. This means that the corporation’s income is taxed at the corporate level. If there are any dividends distributed, then the shareholders pay taxes at the individual level. This is one of the major disadvantages of forming a C corporation; the corporation’s income is subject to double taxation, one time at the corporate level and one time at the personal level.

Other disadvantages of forming a C corporation include:

• It is fairly expensive to form and maintain a C corporation
• There are more formal paperwork requirements to abide by
• There is less flexibility and more formal business requirements

Most states require that corporations hold annual meetings, take a formal vote on certain decisions, and submit annual reports.

Although it will vary from state to state, most states require a number of steps in order to form a corporation, including:

• File Articles of Organization
• Create an Operating Agreement
• Create a Board of Directors
• Appoint officers
• Issue stock
• Appoint a registered agent

Advantages and Disadvantages of a C Corporation

A C Corporation is the traditional corporate structure and is ideal for larger companies or startups seeking venture capital. One of its biggest strengths is the ability to issue multiple classes of stock, which helps attract investors and allow for complex ownership structures.

Advantages of a C Corp include:

• Unlimited shareholders and flexible stock options.
• Easier access to funding through investors or public offerings.
• Enhanced credibility with clients, vendors, and investors.
• Ability to offer benefits like stock options and retirement plans.

Disadvantages include:

• Double taxation on profits (corporate and personal dividends).
• More complex administrative requirements and reporting.
• Mandatory board of directors, officers, and annual meetings.

Despite the double taxation, C Corps can benefit from the 21% flat federal corporate tax rate, making them appealing for high-profit companies planning to reinvest earnings.

What is an S Corporation?

The main difference between a C corporation and an S corporation is how they are taxed. An S corporation is considered a “pass-through” entity, similar to an LLC. This means that the S corporation itself is not subject to double taxation. The corporation’s income passes through to the individual owners, who then pay taxes on their personal tax returns. The corporation’s profits are not subject to self-employment taxes, but the shareholders must be paid a “reasonable salary.” Shareholders are technically considered employees of the S corporation, so any salary they receive will be subject to self-employment taxes, such as Medicare and social security.

An S corporation also cannot have more than 100 shareholders. The shareholders are required to be U.S. citizens or resident aliens. S corporations also provide their shareholders with personal liability protection, similar to an LLC and C corporation.

Business owners might think about forming an S corporation if:

• They want the benefits of a corporation without being subject to double taxation
• They want flexibility to set the “reasonable salary” of the corporation’s shareholders/owners
• They want more flexibility with accounting methods

Advantages and Disadvantages of an S Corporation

An S Corporation offers the liability protection of a C Corp with the tax flexibility of a pass-through entity. Profits and losses pass through to shareholders, avoiding double taxation. However, there are strict IRS requirements — including a limit of 100 shareholders, all of whom must be U.S. citizens or residents.

Advantages of an S Corp include:

• Pass-through taxation (avoids corporate taxes).
• Savings on self-employment taxes through reasonable salary distributions.
• Limited liability for shareholders.
• Perpetual existence even if ownership changes.

Disadvantages include:

• Strict eligibility rules (U.S. citizens or residents only).
• More IRS scrutiny around shareholder salaries.
• Less flexibility in allocating profits and losses than LLCs.

S Corps work best for small to mid-sized businesses earning consistent profits and seeking to minimize self-employment tax liability.

LLC vs S Corp vs C Corp Comparison Table

This table highlights that LLCs offer flexibility, S Corps optimize taxation, and C Corps attract investors, helping business owners determine which structure aligns with their goals.

Choosing Between an LLC, S Corp, and C Corp

When comparing LLC vs S Corp vs C Corp, the right choice depends on your business’s size, funding needs, and tax goals:

• Choose an LLC if you want simplicity, minimal paperwork, and flexibility in taxation.
• Choose an S Corp if you qualify and want to reduce self-employment taxes while maintaining liability protection.
• Choose a C Corp if you plan to raise outside capital, attract investors, or eventually go public.

If you’re unsure which structure best fits your needs, you can consult an attorney through UpCounsel’s legal marketplace for personalized guidance on your business formation.

Frequently Asked Questions

1. Can an LLC be taxed as an S Corp or C Corp?
   Yes. An LLC can elect to be taxed as an S Corp or C Corp by filing IRS Form 2553 or Form 8832. This allows greater control over tax strategy.
2. Which is better for small businesses: LLC or S Corp?
   An S Corp often offers more tax advantages for small businesses with consistent profits, while an LLC is better for simplicity and flexibility.
3. What is the main downside of a C Corp?
   C Corps face double taxation and higher compliance requirements, though they benefit from investor access and growth potential.
4. Can an S Corp have foreign shareholders?
   No. S Corps can only have up to 100 shareholders who are U.S. citizens or resident aliens.
5. Which entity provides the best liability protection?
   All three — LLCs, S Corps, and C Corps — provide limited liability protection, meaning owners’ personal assets are shielded from business debts and lawsuits.

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