C Corporation Vs. S Corporation Vs. LLC

By Rob Jennings J.D.

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.

LLC

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.

S Corporation

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.

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C Corporation

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.

Sole Proprietorship

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.

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Advantages & Disadvantages of a C-Corp or S-Corp
 

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What Forms Do I Need to File for an S Corp?

An incorporated business is automatically designated by the Internal Revenue Service as a C corporation for income tax purposes. However, certain smaller corporations can elect to be taxed as S corporations without forfeiting the liability protections that the corporate structure affords to shareholders. Making the initial election requires filing an IRS form. Once S corporation status is granted, the tax forms the corporation must file annually will change.

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Corporations are business entities formed under state law that exist separately from their owners. An S corporation is simply a C corporation that has elected to be taxed as a pass through entity. Converting from a C-corp to an S-corp has significant tax implications, which include potentially lowering the overall tax burden on the shareholders, but also changing who reports the income each year and limiting when the income can be reported on the shareholder's tax returns. However, an S-corp must meet several criteria, including having less than 100 owners, only having U.S. resident or U.S. citizen individuals and certain entities as shareholders, and not having more than one class of stock.

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