What is the difference between C Corp and S Corp and LLC?

While C-Corps are double taxed, Shareholders of S corporations and LLCs report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

By Brad Nakase, Attorney

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Table of Contents

1. Introduction

2. Registering a Business DBA

3. Pros and Cons of DBAs

4. Understanding Business Structures: C corps, S corps, and LLCs

5. C Corp Business Structure

6. S Corp Business Structure

7. Limited Liability Company (LLC) Business Structure

8. Comparing C Corp, S Corps, and LLCs: Quick Overview

9. Additional Concerns: Choosing a State

10. Selecting a Business Entity Structure

Introduction

If you are embarking on a new business venture or acquiring an established one, it is crucial to first think about the optimal kind of company, often referred to as the “business entity” or “business structure.” Each kind of entity comes with its own set of pros and cons. In this article, our California business startup attorney discusses factors to take into account when contemplating whether form a business as a C corp, S corp, or LLC.

Registering a Business DBA

A “Doing Business As” (DBA) registration does not constitute a distinct business structure like a C Corp, S Corp, or LLC. Instead, it grants a company the ability to conduct business operations under an alternate name. A DBA is also known as a fictitious or assumed business name. Typically, the filing process for a DBA occurs at the county level, although some states may have additional filing requirements at the state level.

For general partnerships and sole proprietorships and, if a DBA is not officially registered, the business name defaults to that of the owner or owners. For instance, if Joan Williams operates an interior design business as a sole proprietor, she would need to file a DBA if she wishes to conduct business as “Williams’ Design.” Otherwise, she would operate under her personal name, Joan Williams.

In the case of a C corp, S corp, or LLC, they too can file for a DBA to operate under a name distinct from the one initially submitted to the state at the time of formation. For instance, a C corp or S corp initially registered as “White and Sons, Inc.” might choose to use a more specific name like “White’s Landscaping” and would need to file a DBA for that purpose.

Pros and Cons of DBAs

For general partnerships and sole proprietorships, the benefit of registering a DBA lies in the ability to operate under a name distinct from that of the owner(s). Unlike incorporating as a C corp or S corp or forming an LLC, there are no continuing compliance obligations.

However, it is important to note that a filing a DBA may not confer legal business entity status, nor does it offer the tax advantages and liability protection associated with incorporating as a C corp or S corp. Furthermore, it does not alter the official name of a corporation or LLC; it simply grants the business the option to operate under a separate name in commerce, either in lieu of or in addition to the official LLC or corporate name.

Understanding Business Structures: C corps, S corps, and LLCs

When establishing your company as a C corp, S corp, or LLC, you will need to submit formation documents to the relevant state agency. C corps and S corps use Articles of Incorporation, while LLCs use Articles of Organization. Incorporating as a C corp or S corp provides a protective shield for personal assets, a contrast to partnerships and sole proprietorships, which carry unlimited liability, regardless of whether they operate under a DBA.

C Corp Business Structure

A corporation is an independent legal entity established under state law, safeguarding the assets of shareholders (owners) from the claims of creditors. Initially, when you incorporate, you default to a standard or “C” corp. This structure comes with a distinct tax status, wherein the corporation’s expenses and income are subject to taxation. If profits are subsequently passed to owners in the form of dividends, they are then subject to personal income tax, resulting in a form of “double taxation” (taxed at both the corporate and personal levels). Due to this, a lot of small businesses shy away from adopting the C corp structure.

Opting for a C corp could be the appropriate choice if you:

Require venture capital for funding
Seek flexible profit-sharing arrangements among owners
Prefer to reinvest business profits to foster growth
Want the flexibility to allocate profits between shareholders and the corporation for tax planning
Seek to establish salaries for owners/employees to reduce Medicare and Social Security taxes
Aim to offer substantial health, medical, and other fringe benefits through the corporation, covering areas like life insurance, transportation costs, and education
Plan on easily selling your business
Intend to implement an accountable plan for entertainment and travel expenses
Wish to provide employees with stock options

S Corp Business Structure

After establishing a C corp with the state, you may opt for S corp tax status by submitting a form to the IRS. In an S corp, losses, profits, and other tax-related matters flow to the shareholders through the corporation and are disclosed on individual tax returns. (The S corp itself is not subject to taxation.)

Choosing an S corp could be the suitable business structure if you desire:

The advantages offered by the corporate business structure (as detailed above), but also want to benefit from pass-through taxation.

Limited Liability Company (LLC) Business Structure

An LLC is yet another type of business entity formed in accordance with state law, offering personal liability protection. From a tax perspective, an LLC operates in a manner akin to an S corp, where business expenses and income are reflected on your individual tax return. If you are an LLC’s sole owner, you are regarded as a disregarded entity. What does this mean? You must document the LLC’s financials on Form 1040’s Schedule C—similar to how sole proprietors report.

Opting for an LLC could be the best-fitting choice if:

Your startup foresees losses for a minimum of two years, and you would like the ability to pass these losses through to yourself and other members (owners) of the LLC.
You seek flexibility in your accounting methods, as an LLC is not obligated to utilize the accrual accounting method, which is typically mandated for C corporations.
Your business holds real estate assets.
You desire a more adaptable management structure. LLCs offer greater flexibility in how the company is organized compared to corporations.
You aim to reduce ongoing formalities. Unlike C corps and S corps, which must conduct annual meetings for shareholders and directors, and maintain extensive documentation for all big company decisions, LLCs face fewer stringent requirements for meetings and documentation.

Comparing C Corp, S Corps, and LLCs: Quick Overview

All three – C corps, S corps, and LLCs – grant limited liability protection for the owners’ personal assets.
LLCs and S corps are frequently utilized for small-scale business operations. Both allow for business expansion and the addition of new owners.
Income in S corporations and LLCs is passed through to owners, who then document it on their individual tax returns.
For shareholders of S corps who also work in the business, they function as the S corp’s employees. They are subject to Medicare (FICA) and Social Security taxes on their compensation, but not on the distributions they get.
Members of an LLC are considered self-employed and are responsible for Medicare and Social Security taxes, which are paid through self-employment tax based on their share of the business’s net income.
C corporations, S corporations, and LLCs each offer distinct tax advantages, including deductions not applicable to sole proprietors.
Opting for a C corporation or S corporation, as well as an LLC, can make potential customers, vendors, partners, and employees view the company as more credible.
Raising capital is generally more straightforward with a C corporation or S corporation.

Additional Concerns: Choosing a State

While many individuals choose to make an LLC, C corp, or S corp in the state where their business is based, this is not obligatory. You have the freedom to select from any of the fifty states or DC. It is wise to evaluate potential benefits or drawbacks associated with each state before making a decision.

Keep in mind, if you choose to incorporate in a state different from where your business operations are located, you may need to register and qualify to do business in that state. This involves paying registration fees, as well as continuous taxes and fees, to both the formation/incorporation state and the state of qualification.

Selecting a Business Entity Structure

The choice between forming a C corp, S corp, or an LLC hinges on your specific business circumstances and objectives. In the case of existing LLCs and corporations contemplating a DBA, the following points may be crucial to consider:

Does the proposed new name align with a business specialization that is permissible under the stated business intent (as defined in your Articles of Incorporation or Organization)?
Are there benefits to establishing a subsidiary or an completely separate business entity to run in conjunction with your existing enterprise?

For tailored advice pertaining to your individual situation, consulting with a legal professional or accountant is recommended.

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