LLC vs. S-Corp vs. C-Corp

How to Choose a Business Structure: Considerations When Selecting an Entity and Registering a Business

Before deciding what type of business structure to select for your company, it's important to recognize the various factors at play. Below are some key characteristics to keep in mind as you evaluate your options:

• Level of personal liability protection afforded by each business structure

• Potential tax implications

• Ownership and management structure

• Regulatory requirements and ongoing compliance obligations

• Scalability and growth potential

By carefully considering these and other factors, you can better determine the right structure for your startup.

Different Types of Business Structures

There are several different types of legal structures for startups to choose from, each of which will vary in terms of liability protection, taxation, and management structure. The most common entities include:

• Sole proprietorship

• Partnership

• Limited liability company (LLC)

• Corporation (including S-Corps and C-Corps)

• Nonprofit organizations

Limited Liability Company (LLC)

The following attributes typically characterize LLCs:

• Ownership and management flexibility. LLCs can have one or multiple owners, known as members, making the LLC a great option for both new and growing businesses. Management is also flexible, as LLCs can be managed by the business's owners (member-managed) or appointed managers (manager-managed).

• Limited liability. One of the primary benefits of an LLC is limited liability protection for members. This means that the business owners typically are not personally liable for the debts and other liabilities of the business entity.

• Limited formalities. Compared to other types of business entities, LLCs generally have fewer formalities and ongoing legal requirements. For example, LLCs are not required to hold periodic meetings, have a board of directors, or keep extensive records.

• Flexible taxation. LLCs are taxed as sole proprietorships (single-member) or partnerships (multi-member) by default. However, depending on their financial needs and goals, they may elect to be taxed as a corporation.

An LLC is a flexible business structure that is a popular choice among startups.

S-Corporation (S-Corp)

An S-Corp is a type of corporate entity that is characterized by pass-through taxation. This means that the profits and losses of the corporation pass through the entity to the owners, known as shareholders, for federal tax reporting purposes. As a result, S-Corps can avoid double taxation on any corporate income. Below are some other notable characteristics of the S-Corp:

• Must be a domestic entity

• Personal liability protection for shareholders

• May only issue one class of stock

• Cannot have more than 100 shareholders

• Partnerships, corporations, and certain other entities may not be shareholders

The S-Corp allows small to mid-sized corporations to benefit from personal liability protection and favorable tax advantages.

C-Corporation (C-Corp)

C-Corps are another type of corporation characterized by personal liability protection for their shareholders. However, they are also typically characterized by the following:

• More strict corporate formalities such as financial disclosure, record-keeping, periodic meetings, and annual reporting requirements

• Subject to double taxation, meaning that both the entity itself and the individual shareholders are taxed on business income

• May issue more than one class of stock

• May conduct business domestically or internationally

• Fewer restrictions on who may be a shareholder

A C-Corp can be a great option for companies that plan to grow, raise money through the issuance of stock, and eventually go public.

Pros and Cons of an LLC, S-Corp, and C-Corp

Here are some of the most notable advantages and disadvantages of each business entity structure at a glance.

Once you've carefully considered your needs, goals, and options, you can select the business structure that best meets those needs.

Answers to Your Frequently Asked Questions About Choosing the Right Structure for Your Startup

Do I Need to Decide Between an LLC, S-Corp, and C-Corp Before Starting My Business?

No. Many businesses start as sole proprietorships or partnerships, which may not require formal registration with the state. However, it's worth noting that these types of business entities may not offer as robust protections and advantages as LLCs, S-Corps, and C-Corps.

Which Business Structure Is the Best?

In reality, there is not necessarily any best business structure, and each business structure will have its advantages and disadvantages. The best business structure for your business will ultimately depend on your particular company's needs and goals. And remember, businesses can—and frequently do—restructure as they grow, and their goals and preferences change over time.

Can an LLC Be Taxed As a Corporation?

Yes. In fact, LLCs have a number of options when it comes to taxation. By default, LLCs are taxed as sole proprietorships (single-member LLCs) or partnerships (multi-member LLCs). However, an LLC may instead elect to be taxed as an S-Corp or C-Corp with the IRS. Consult with a tax advisor to learn more about what tax treatment might make sense for your needs and goals.

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.