Limited liability companies, or LLCs, are creatures of state law that offer the benefits of limited liability and flexible tax treatment without the onerous paperwork requirements associated with corporations. Subchapter S corporations and C corporations, on the other hand, are corporations that have elected to receive tax treatment under either Subchapter S or C of the Internal Revenue Code. Deciding how to proceed requires an understanding of the pros and cons of each option.
An LLC requires comparatively little to form and operate in terms of paperwork. The owners are called "members" and are protected from liability arising out of the acts of other LLC members or employees. Members can choose to file company taxes as a sole proprietorship, a partnership, an S corp or a C corp. States generally restrict the degree to which LLCs can be transferred, and in some states an LLC dissolves upon the death or bankruptcy of one or more members.
An S corp requires a corporate charter, bylaws, a board of directors and annual shareholder meetings. Like an LLC, it provides limited liability to the owners -- called shareholders -- and offers the possibility of escaping double taxation by passing through the corporation's profits and losses to the individual tax returns of the shareholders. Unlike an LLC, an S corp with a single shareholder can survive the death of that shareholder and pass to his heirs. An S corp is not permitted to have more than 100 shareholders.
Like an LLC and S corp, a C corp offers limited liability to its shareholders, protecting their personal assets in the event of wrongdoing by other shareholders or employees. A C corp can have an unlimited number of shareholders, giving the company great flexibility in terms of issuing and selling stock to raise capital. A C corp is taxed on its profits, and the shareholders are taxed again on the dividends they receive on their stock in the corporation.
Deciding on a Structure
Whether to form an LLC or to incorporate and elect Subchapter C or Subchapter S status is a decision best made in conjunction with an attorney and a certified public accountant. An LLC offers simple startup and operating requirements, and flexible tax treatment to go along with its limited liability, which may may make it attractive to small businesspeople. An S corp offers pass-through taxations like an LLC, and may be more attractive to a startup entrepreneur who hopes to eventually sell the business for a profit. A C corp may be appropriate for a new business that expects to grow very large and eventually "go public."