Choosing a business structure that fits your goals is as essential to entrepreneurial success as funds are. But as a newbie, it can be a bit tricky to decide which is best for you. Are you feeling stuck deciding between an LLC, S-corp, or C-corp? Then this guide is the perfect starting point for you!
Read on to find out everything you need to know about these business structures and their pros and cons. And by the end, you will have a good idea about the most suitable option for you!
What is an LLC?
Let’s start with the basics. Before you can compare different business structures, you need to understand what they are individually. So, what is an LLC? Here’s what you need to know:
LLC stands for Limited Liability Company. This business structure safeguards business owners from personal accountability for the company’s liabilities and debts. This means that if your company ever gets sued or incurs debt, you won’t have to pay those off with your personal income. Instead, creditors can only go after the company’s business assets.
LLCs are one of the easiest business structures to set up, making them a popular choice for new business owners.
LLCs offer pass-through income and a range of tax options. This means you can choose to pay tax as a C-corp, S-corp, etc.
Because of its flexibility, you can set up a single-member LLC or bring in as many members as you like in a multi-member LLC.
Are you looking to launch your first-ever LLC? Get in touch with Gordon Law Group to get the best help with the legal processes involved!
What is a C-corp?
A C-corp is one of America’s most widely used business structures for various reasons. But just because it is the most prevalent, that doesn’t mean it will be the best option for you, too. We’ll get to the business structure selection process a little further in the guide.
For now, let’s dive into what a C-corp is. A C-corp is a structure that, in terms of tax, is separate from its business owners. Like an LLC, a C-corp also protects your personal assets. But its tax treatment is vastly different.
Owners of a C-corp are subject to double taxation. The corporation itself is subject to 21% tax on earnings. Then, profits can be distributed to shareholders, and each shareholder must pay personal income taxes on distributions.
C-corps are often chosen because they are a preferred business structure for raising outside capital and because their shares can be easily sold on the stock market.
Contact Gordon Law Group for further information on tax considerations. Our lawyers will help you choose the most suitable structure for your brand!
What is an S-corp?
Unlike the previously discussed entities, S-corp is a tax election (not a business entity). Both LLCs and C-corps can elect for an S-corp tax status—if they meet the IRS’s specified requirements on Form 2553. And this simple election can give tax benefits to either structure, depending on your unique circumstances.
Also called S Subchapter, an S-corp allows you to write off a portion of self-employment taxes. This means by electing S-corp status, you generally save by not having to pay self-employment tax, unlike a sole proprietorship or an LLC that does not make an S-corp election!
What’s interesting is that by electing S-corp tax status, C-corp owners can say goodbye to double taxation! And in this way, you can significantly reduce your corporate-level federal taxes.
Choosing a Business Structure
The moment we’ve all been waiting for: LLC, S-corp, or C-corp? Which is best for you? The answer is, it depends on your short- and long-term business goals.
Let’s compare each structure to get an idea of the benefits you can get from each.
S-corp vs. C-corp
- S-corp owners may pay lower taxes compared to owners of C-corps with the same revenue.
- S-corps can only have under 100 shareholders (owners who must be US nationals). C-corps don’t have any such restrictions.
- S-corps can only have one class of stock; C-corps can have many classes!
- S-corps provide pass-through taxation. You, as an owner, report the company’s revenue as your personal income on your tax return. C-corporations, on the other hand, are subject to double taxation (as mentioned earlier).
LLC vs. S-corp
- LLC is a legal entity, unlike S-corp, which is a tax classification.
- LLCs can have multiple classes of membership interests, while an S-corp can only have one class of stock.
- LLC owners can easily choose to be taxed as S-corps.
- Making the S-corp election involves more paperwork and maintenance (e.g., you’ll have to set up payroll and file additional monthly and quarterly paperwork).
- S-corps can save money on taxes by allowing you to take distributions tax-free.
- The S-corp structure also gives you more flexibility when it comes to compensating yourself. To maintain an S-corp, you must pay yourself a “reasonable” salary, while the remainder of net profit will generally be taxed to you at ordinary income rates. The reasonable compensation can include health insurance, childcare, etc.
- Since you get to be both employer and employee in an S-corp, you can contribute more to a 401(k) through this structure.
LLC vs. C-corp
- LLCs have pass-through income, while corporations are subject to double taxation.
- C-corps can go public and sell shares on the stock market. An LLC, on the other hand, can sell units of ownership but not stocks.
- LLCs offer flexible management, while C-corps are somewhat rigid. There must be a functional board of directors at a C-corp at all times.
- Since C-corps also allow you more freedom to write off losses as tax-deductible, you can reinvest profits.
- C-corps can more easily make changes to management and ownership.
- C-corps are subject to much stricter regulations.
Read more about LLC vs. C-corp for startups.
With this overview of the advantages and disadvantages of America’s most popular business entities, are you ready to launch that dream business?
Get in touch with Gordon Law Group to learn whether an LLC, S-corp, or C-corp is best for your specific situation and business goals. We can also help you seamlessly convert if you have already chosen one but wish to make a transition!