Starting a Business? The Difference between LLC, S Corp and C Corp Types of Business
When starting a business, one of the vital decisions to make prior to everything else is to figure out what type of business you want to register. You would consider the characteristics of a sole proprietorship, a partnership, a limited company to identify which better suits your situation at hand. In making your choice, you may want to consider separating your personal assets from the business. In order to form a business which will allow for protection of your personal assets, there are three business structures for limiting liability you can investigate in the form of a Limited Liability Company (LLC), an S-Corporation or a C-Corporation.
Limited liability seeks to protect the business owners’ personal assets from incorporation into the business in an unforeseen eventuality. When it comes to the LLC, you are safe from personal liability. LLC has minimal start-up requirements. In C-Corps and S-Corp the shareholders are safe from liability. To start, both the C-Corps and S-Corps require elected officers or directors, annual general meetings and annual report fillings. The shareholders in this venture are not accountable for the investment made and are protected against seizure of personal assets by only holding the money they have invested already.
Putting management in focus, both C-Corps and S-Corps have to undertake an election of a board of directors. The board of directors is entirely in charge of the management of the business’s activities. As for LLC, management is left to the members to decide on the best management practices.
The taxation system differs across all the three corporate structures. The LLC is advantageous for its simplified taxation rules. The C-Corps taxation system offers the opportunity for tax savings. This can be exploited through income splitting. The S-Corps on the other hand, offers an opportunity to make some saves on Self-Employment tax. However, a substantial salary must be earned to feel the effect.
All these types of businesses have their drawbacks. The decision is yours to make on which is a lesser evil. For the liability protection, the LLC enjoys to a lesser degree of than is provided by corporations. It is the least safe haven among the limited liability. The disadvantage of S-Corps is that they are complicated from the accounting angle. When running an S-Corp, you will have to part with higher legal and accounting fees. The major disadvantage of the C-Corp is the double taxation of dividends; in addition, the high legal and accounting fees are a deal breaker.
Compare and Contrast: LLC, S CORP and C CORP
The three business structures offer both advantages and disadvantages. Any entrepreneur who is out to start a business and looking into protecting their personal assets should be guides by the following factors:
- 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.