C Corp vs S Corp vs LLC: What’s Best For You?
When starting a new business, one of the most important decisions is selecting the right legal structure. The most common options are C Corporations (C Corps), S Corporations (S Corps), and Limited Liability Companies (LLCs). Each has distinct legal, tax, and administrative implications. Here’s a breakdown to help guide your choice.
Differences Between LLC, S Corp, and C Corp
The primary distinction between these entities lies in ownership structure, compliance requirements, and formality.
- LLC: A flexible structure with fewer formalities, ideal for small businesses. Owners are called “members,” and management can be member-managed or manager-managed. For many new companies, startup and business formation is simpler and more flexible under this model.
- S Corp: A special tax election made by a corporation or LLC that allows profits and losses to pass through to shareholders. Ownership is limited to 100 U.S. citizens or residents, and only one class of stock is allowed.
- C Corp: A traditional corporate structure with the ability to issue multiple stock classes and accept foreign shareholders. It has stricter compliance but supports more complex ownership and investment structures, which can be advantageous in mergers and acquisitions or when implementing phantom stock plans.
Taxation of LLCs, S Corps, and C Corps
Tax treatment is a major factor when choosing a business entity.
- LLC: Default pass-through taxation, meaning profits are reported on members’ individual tax returns. LLCs can elect to be taxed as an S Corp or C Corp.
- S Corp: Also pass-through, but with the added benefit of potential savings on self-employment taxes. Owners must pay themselves a reasonable salary.
- C Corp: Subject to corporate tax rates and potential double taxation when dividends are distributed to shareholders. However, retained earnings can be reinvested into the business, avoiding double taxation and benefiting from lower tax rates. Long-term planning may benefit from support through outside general counsel.
Entity Choice for Small Business Owners
Many small business owners prefer LLCs for their simplicity, flexibility and reduced formalities. However, S Corps can provide meaningful tax savings if the business is profitable and the owner is actively involved (especially true for single-owner entities). C Corps are usually reserved for companies planning to raise venture capital, issue stock options or issue non-voting stock. Additional planning may involve corporate resolutions or customized contract drafting.
Converting Between Entity Types
Business needs evolve, and so can your structure. An LLC can elect S Corp or C Corp status with the IRS, and corporations can convert through formal restructuring or state-level filings. However, these conversions can have tax consequences, so it’s essential to consult a business attorney or CPA. More complex matters may be handled in collaboration with a business attorney.
Choosing the Right Entity
The best structure depends on your business model, growth expectations, investor needs, and tax goals. Consider:
- Do you want to minimize administrative burden? Consider an LLC.
- Do you expect to take profits regularly and reduce self-employment tax? An S Corp might fit.
- Do you plan to scale significantly or attract investors? A C Corp may be required.
Choosing the right entity is a foundational decision. Evaluating each option’s legal and tax implications will ensure your structure aligns with your short- and long-term goals.
About
Attorney Collier started his own law firm straight out of law school and has been practicing law in Ohio for 5+ years. During that time, Joe focused on business law and litigation, gaining some exposure to intellectual property law. While running his firm in 2021, Joe decided to go back to school and get his patent license. Since then, Attorney Collier has been focusing on protecting innovators and entrepreneurs through his expertise in intellectual property and business law.