Know the Difference: LLC vs. S-Corp vs. C-Corp

How should you structure your new business? There are several different options to be considered depending on your business goals. Here we will evaluate the differences between filing as an S Corp, C Corp, or LLC. 

LIMITED LIABILITY COMPANY (LLC)

The LLC (Limited Liability Company) is a corporate legal structure that protects owners from the personal responsibilities of company liabilities. Any individual or entity can be a member of an LLC except for banks or insurance companies. LLCs have greater flexibility when it comes to running a business as well as more options when it comes to taxation. The creation and management of an LLC is usually much easier than an S or C Corp.

One disadvantage of an LLC is the higher tax rate that comes along with filing income and loss on personal tax returns opposed to corporate tax that usually has a lower rate. The limited life of an LLC is also a disadvantage because once a member dies or leaves the business, the LLC has to be dissolved.  

S-CORPORATION (S-CORP)

An S corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. Shareholders report the income and losses on their personal tax returns at their individual tax income rates. This helps them avoid double taxation at both the corporation and individual shareholder levels. The corporation's losses also pass through onto the shareholders who can use those losses to offset income that is subject to taxes. Another advantage that an S-corp holds is the eligibility of shareholders to have a deduction of up to 20% of net “qualified business income”. 

For disadvantages, in the case of an S-corp, there cannot be more than 100 shareholders, as opposed to the unlimited members an LLC allows. There are also restrictions on who can become a shareholder. In order to own shares in an S corp, you must be an individual and be a U.S. citizen or resident. This makes it hard for S-corps to obtain funding because entities wanting to provide financing are ineligible to become shareholders. 

C-CORPORATION (C-CORP)

A C corporation, unlike the other two examples, is taxed separately from its owners. Because of this, they can be subject to double taxation if corporate income is distributed to business owners as dividends, which are considered personal taxable income. 

A C-corp can have an unlimited amount of shareholders and anyone can own shares including business entities and non-U.S. citizens. Because of the limited restrictions on who can be a shareholder within a C-corp, it makes it easier for C-corp to obtain equity financing. They also can issue more than one class of stock, including stock with preferences for dividends and distributions. Another advantage is that the maximum corporate tax rate is lower per the 2017 tax reform act compared to the personal income tax rates applied to S corps and LLCs. 

All three of these business structures have their pros and cons. Based on your business needs, you are sure to find the right fit in an LLC, S Corp, or C Corp.