In today's litigious society, obtaining limited liability when starting a business has become more important than ever for the upstart entrepreneur. While the limited liability company business structure is popular, many owners choose to organize as a Subchapter C corporation or a Subchapter S corporation. Making a decision as to how to organize requires an understanding of the basic characteristics of each corporate form.
A limited liability company has members, not shareholders, who appoint managers to run the company and may elect to report the company's earnings on their own personal tax returns -- this is referred to as "pass-through" tax treatment. Although state law may place restrictions on the degree to which members can be involved in the day-to-day operations of the company, the absence of a requirement for a board of directors generally gives members a greater level of control over company operations compared to corporate shareholders and reduces the complexity of conducting those operations.
The distinction between S corporations and C corporations refers to the set of IRS rules under which a corporation chooses to be taxed. While an S corporation offers the same limited liability to shareholders as a C corporation or an LLC, a S corporation may not have more than 100 shareholders. This limits the corporation's ability to raise capital through the issuance of stock. Unlike an LLC, an S corporation must have a board of directors, stock certficates and stock ledgers. Unlike a C corporation, the shareholders of an S corporation can elect to receive pass-through taxation of corporate profits and losses.
A C corporation resembles an S corporation in many ways. Both require articles of incorporation, bylaws, board resolutions, stock certificates and stock ledgers. Additionally, both require the appointment of a board of directors to manage the company and both can issue and sell stock to raise capital. Unlike an S corporation, however, there exist no restrictions on the number of shareholders. In addition, C corporation shareholders do not have the option to pass corporate profits and losses on to their own personal tax returns.
Some entrepreneurs will face the decision of whether to seek limited liability at all. LLCs, S corporations and C corporations are all united in their inability to protect a member, shareholder, officer or employee from liability for his own acts in the course of business. As such, a sole proprietor who intends to operate the business on his own without employees will realize no limited liability advantage from organizing as one of these entities. As each state has documentation requirements and filing fees for limited liability companies and corporations, the financial cost and time requirements of these corporate forms may not be justified by the advantages they offer the entrepreneur.