Choosing Your Entity Type
If you're starting a business for the first time, choosing your entity type can seem like a tricky endeavor. What is the difference between a C Corp
One of the initial choices you'll need to make as a small business owner is the form of organizational structure to adopt. A C corporation (C corp), S corporation (S corp), and limited liability company (LLC) are just a few of the available options. To select the one that's best for you, it's essential to know how each type of business structure varies from the others in terms of its own qualities and advantages.
C-Corp:
Traditional business structures like C corporations are taxed separately from their owners. This means that instead of the profits being distributed to the individual owners and taxed at their individual tax rates, the business itself is responsible for paying taxes on its income.
C corporations allow for an infinite number of shareholders and the opportunity to raise funds through the selling of stock. C corporations are subject to double taxation, which means that after the business pays taxes on its income, the shareholders also pay taxes on the dividends they get.
C Corporations are how most venture-backed startups are organized.
S-Corp:
In many aspects, a S corp is similar to a C corp, but it is taxed differently since it is a pass-through corporation, which means that the earnings are distributed to the owners individually and subject to their individual tax rates. S corporations don't face double taxes, making them generally more tax-efficient than C corporations. However, there are some limitations on S corps, such as a cap on the number of shareholders (100 or fewer), making them less attractive for founders looking to raise money. The other requirement for S Corps are that all shareholders must be U.S. citizens or resident aliens — again, a limiting factor in raising money from firms or individuals outside the US.
LLCs:
A hybrid business organization called an LLC combines aspects of corporations and partnerships. Similar to a S corporation, an LLC is taxed as a pass-through entity, which means that the profits are distributed to the individual owners for personal taxation. Since an LLC provides the same level of liability protection as a corporation, the owners' private assets are often shielded from corporate debts and liabilities. LLCs can be owned and managed by one owner or by several, giving them flexibility in terms of ownership and management structure.
In summary, there are a number of important distinctions between C corps, S corps, and LLCs. C corporations allow for an unlimited number of shareholders, the capacity to raise capital through the sale of shares, but are susceptible to double taxation. S corporations are subject to specific ownership limits yet are taxed as pass-through businesses and provide greater tax efficiency. Although they are taxed as pass-through organizations, LLCs provide liability protection and flexibility in terms of ownership and management structure. Depending on your unique needs and objectives, your business will require a different business structure.
*Note: I am not a tax accountant or lawyer by trade. Please consult yours before making decisions about your company.