S Corp vs C Corp vs LLC vs LLP: Everything You Need to Know
The differences between an S Corp vs C Corp vs LLC vs LLP offer numerous advantages and disadvantages to each entity.3 min read
The differences between an S Corp vs C Corp vs LLC vs LLP offer numerous advantages and disadvantages to each entity. In order to determine which business structure will best suit your company, it's important to take a thorough look at the characteristics, benefits, and limitations of each type of structure.
S Corporation (S Corp)
For you personally, an S Corporation offers the same type of liability as an LLC does. The main difference between the two types of entities is the way you'll pay tax on your income.
With an LLC, business income and expenses are accounted for in the personal tax of the business owner. With an S Corporation, the company essentially pays you a salary, which you then pay taxes on as regular income. In addition, any extra profits are considered dividends, which are taxed less than they would be in an LLC. Therefore, in some situations, S Corporations offer significant tax benefits.
S Corporations have only one class of stock and they must not exceed 100 shareholders.
C Corporation (C Corp)
The principal difference between a C Corporation and other structures is again the difference between tax options. An S Corporation and an LLC have different ways of dealing with tax, but the responsibility for paying tax on the profits of the company stays with the owners. The C Corporation and the LLC both offer limited liability protection for their owners.
C Corporations have no limits on the classes of stock or number of shareholders allowed.
To form a C Corporation, a company must submit Articles of Incorporation. Shareholders purchase stock in the company as a form of collateral.
Corporations receive favorable tax options when it comes to the ability to deduct expenses from company benefits, such as health insurance, life insurance, and retirement packages. These benefits are not considered income to the employee, so they are not taxed. As the IRS strictly defines “employee,” for an owner to be considered an employee, the business must be a corporation.
Some banks and investors prefer to invest in corporations rather than LLCs, so securing funding for a corporation may be easier than other entities. If you intend to seek funding from venture capitalists or make an initial public offering (IPO) in the future, forming as a C Corporation is your best bet.
Advantages of incorporation include:
- Personal liability protection.
- Easy owner transference.
- Unlimited life span.
- Tax benefits.
- In general, easier fundraising.
Disadvantages of incorporation include:
- Legal requirements (meetings, filings, etc.) and bureaucracy.
- Expensive formation requirements.
- Limitations due to state regulations.
- In some cases (equity capital, debt capital, etc.), fundraising is more difficult.
Limited Liability Company (LLC)
A limited liability company (LLC) is a basic business structure that is suitable for many companies, including those with just a single owner or a few employees up to much larger companies. The main purpose of an LLC is to remove personal liability for any debt or actions of the company. This means the company holds those liabilities itself.
When it comes to determining how it will be operated and how the owner's financial interests will be divided, an LLC is the most versatile of all the business entities. When it comes to income tax, it can even choose to be taxed as a C corporation or an S corporation, rather than as a sole proprietorship or a partnership.
Thanks to its flexibility, the LLC structure is best suited for owners who desire more options regarding the management and taxation of their company.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) and an LLC have some core similarities, but the difference between them primarily relates to liability. In some cases (e.g. fraud), the owners of an LLC may be held liable for actions of the company. Even if it was actually your partner who committed fraud, as a company owner, you may still be liable. An LLP may protect against this kind of situation, as the structure limits the liability of each partner.
An LLP has no limits on the number of partners that may be involved. Partners may be general or limited.
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