S Corp vs C Corp vs LLC

One of the most significant differences between S Corp vs. C Corp is that the profit from the company is taxed at the corporate level, and the dividends to the shareholders are also taxed. For S Corp and LLC, the profits are not taxed at the corporate level, but the dividends to the shareholders are taxed.

Douglas Wade, Attorney

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Inc vs LLC

	C Corp	S Corp	LLC
Owners of business	Shareholders	Same as for C corporation	Members
Personal liability for business debts	None for shareholders	Same as for C corporation	Members do not have any personal liability

Restrictions on nature of business	Formation of banking, insurance, and other special businesses prohibited in some states	Same as for C corporation—however, if converted from C to S corporation, then excessive passive income (such as from rents, royalties, interest, etc.) can jeopardize tax status	Same as for C corporation; some states prohibit performance of professional services
Restrictions on number of owners	One-person corporations permitted in most states allow one-person corporations; some states require two individuals to serve as officers	Same as for C corporation, but with a maximum of 100 shareholders	One member allowed (every state)
Management decision-making	Board of Directors	Same as for C corporation	As a rule, members; for a manager-managed LLC, can be managers instead
Parties authorized by law to legal bind business	Directors and Officers	Same as for C corporation	As a rule, any member; if a manager-managed LLC, can be managers
Effect of death or separation of an owner	No effect unless corporation is solely owned	Same as for C corporation	Dissolution unless remaining members votes to continue business (in a small number of states)
Limitations on transfer of ownership interests	Transfer of stock may be limited due to securities laws or restrictions placed in articles of incorporation or bylaws	Same as for C corporation—but transfers are limited to persons and entities qualifying as S corporation shareholders	Unanimous consent of non-transferring members possibly required by state law or by operating agreement
Extent of organizational paperwork and ongoing legal formalities	Filing for start is required; bylaws are recommended; annual meetings are required	Same as for C corporation	Filing is required for start-up; operation agreement is recommended; under normal circumstances, meetings are not required
Funding source for start-up	Initial shareholders (some states prohibit purchases of shares with a promise to perform services or to contribute cash in the future)	Same as for C corporation—but it is not permitted to issue different classes of stock with different financial provisions	Members (as a rule, they may invest with a promise to perform services or to contribute cash in the future)
Usual method for business to obtain needed capital	Flexible; outside investors permitted to buy various classes of shares; bank loans backed by shareholders’ personal assets (if corporation has insufficient credit history); permitted to go public (IPO) if substantial cash infusion is needed	Generally same as for C corporation—but no foreign, partnership, or corporate shareholders permitted; number of shareholders must be limited to 100; different classes of stock to investors not permitted, except for shares having different voting rights	Members make capital contributions from members; banks issue loans backed by members; personal assets (if LLC has insufficient credit history)
Ease of conversion to another business form	Change to S corporation permitted by filing simple tax election; change to LLC can involve tax costs and increased legal complexity	Generally same as for C corporation—it is possible to terminate S tax status to become C corporation, but then S status cannot be elected again for five years	Change permitted to general or limited partnership, or to corporation; legal paperwork involved
Do federal and state securities laws apply to establishment or sale of ownership interests?	Yes. Issuance or transfer of stock subject to state and federal securities laws, otherwise, it must qualify for exemptions under the exemptions provided by these securities laws	Same as for C corporation	No (probably), if all members are active in business
Which type of owners prefer each form for doing business?	Owners who want limited liability along with the ability to divide income between themselves and a separately taxed business	Owners who want limited liability, along with application of individual tax rates to business income; must be willing to meet initial and ongoing S corporation requirements	Generally, owners who want limited liability along with pass-through taxation; particularly beneficial for smaller, privately held businesses
Taxation of business profits	Divided and taxed at corporate rates and at the shareholders’ individual tax rates	Individual tax rates of shareholders	Individual tax rates of members
Tax-deductible fringe benefits available to owners working in business	Employee-shareholders can have tax-deductible fringe benefits; employees’ medical expenses can be reimbursed; tax-free term life insurance can be provided; stock equity plans can be established for employees	Same as for general partnership; however, but employee-shareholders owning 2% or more of stock are restricted from receiving deductible corporate fringe benefits; equity-sharing plans generally not available	Owners receive tax benefits associated with sole proprietorship (one-member LLCs) or partnership (multi-member LLCs)
Automatic tax status	Yes, upon filing Articles of Incorporation with the corporate filing office in the respective state	No; requirement must be met, and tax election form filed with IRS (and sometimes corresponding state authority as well); revoked or terminated tax status cannot be chosen again for five years	Yes, one-member LLC treated as sole proprietorship; multi-member LLC treated as partnership
Payment of taxes due when business is formed?	Generally not taxable if IRC Section 351 requirements are met	Same as for C corporation	Generally, setting up is tax free; individual income taxes may be due if a member contributes services as capital contribution
Deductible of business losses	Corporation is permitted to deduct business losses (shareholders may not deduct losses)	Shareholders may deduct their respective shares of corporate losses on their individual tax returns, but must comply with passive loss limitation; normally, shareholders do not receive the tax benefit of entity-level debt	Follows sole proprietorship or partnership rules, depending on tax status of LLC
Tax level at time business is sold	Two levels: shareholders and corporation may both be taxed on sale of business	Normally taxed at personal tax levels of individual shareholders; however, corporate-level tax is sometimes due, if S corporation was formerly a C corp.	Follows sole proprietorship or partnership rules, depending on tax status of LLC

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