Difference between LLC, S Corp and C Corp
If you're thinking of starting a business, one of the first decisions to be made concerning the business is to register as which type of business. Would your small business operate more effectively as a sole proprietorship or partnership? Keep in mind that sole proprietorships and partnerships have unlimited liability, meaning if your business is subjected to a lawsuit, the business owner(s) personal assets are not protected. In order to form a business which will allow for protection of your personal assets, there are three business structures for limiting liability we can explore in the form of a Limited Liability Company (LLC), an S-Corporation or a C-Corporation.
Personal Liability
Limited liability attempts to establish a safe business environment for people who wish to venture out on a personal business plan.In the case of the LLC, owners are not typically held liable. In C-Corps and S-Corp the shareholders are not typically held liable. Creating an LLC involves relatively few requirements. Both C-Corps and S-Corps require elected officers/directors, annual meeting and annual report fillings. Shareholders are protected by only holding the money they have invested and are not accountable for the investment made.
Management
When it comes to management, both C-Corps and S-Corps have to elect a board of directors, whom responsibility it is to manage the business's activities. In cases of LLC, the members have the option to choose a structure they like best.
Taxation
Taxations differ in all three corporate structures. The C-Corps offer the potential for tax savings through income splitting. If we take a look at the S-Corps, you will see they offer a way for you to save on Self-Employment tax, but a sort of reasonable salary is needed. Savings don't really kick in until your business is making a substantial profit. The advantage of the LLC is simply taxation rules.
Disadvantages
The LLC comes with a lesser degree of liability protection than is provided by corporations. The disadvantage of S-Corps is that they are complicated from the accounting angle. When running an S-Corp, you will have to shell out higher legal and accounting fees. The primary disadvantage of the C-Corp is the double taxation of dividends.A second disadvantage is higher incurred legal and accounting fees.
Similarities and Differences
These three business structures one could set up for limited liability offer some advantages and disadvantages in the same time. Anyhow, it is recommended for those who are thinking about a business to form one of these for protecting personal assets. Corporations can be compared with help of the following features:
- Personal liability. Where in an LLC, members are not typically held liable, neither are they held liable in an S-Corp or C-Corp
- Business Structure. An LLC can choose the structure the owner likes best, while S-Corp and C-Corp have to elect board directors or officers
- Taxation. An LLC has simpler taxation rules and easier preparation requirement. S-Corps and C-Corps have rather detailed tax structures and should be explored more fully before deciding if this is the correct option for you. S-Corp tax filing fees are higher than the LLC and C-Corps are notable for their double taxation of dividends.
