S Corporations, C Corporations, and LLC’s: Understanding the Difference
You know you need to organize your business, and you’ve heard terms like c-corp, s-corp, and LLC, but you don’t know the difference between them. What do you do? The most important thing to realize is determining which entity is right for you depends greatly on your individual situation. No amount of research online or talking to friends can give you the same advantage of having an attorney examine your unique facts. This article will give you a basic overview of the difference between S-Corporations, C-Corporations, and LLC’s, so you will come into your meeting with a general understanding of your options.
S-Corporation vs. C-Corporation
Many people believe S-Corporations vs. C-Corporations are two different types of corporations. From a management and operational standpoint, they are mostly the same. Both provide limited protection for the shareholders from the corporation’s liabilities (provided formalities are followed). Both have the same organizational structure, with boards of directors, officers, and shareholders. Both have the same rules for management.
The main difference is in the tax treatment. A C-Corporation is the default, while a S-Corporation has a special tax election status with the IRS (the name comes from Subchapter S of the Internal Revenue Code). To claim that status, you’d have to file a form with the IRS. A C-Corporation is a separately taxable entity, while S-Corporations are pass-through tax entities. What does that mean? It means C-Corporations pay income tax at the corporate level, and shareholders pay taxes again when income is distributed as dividends. However, with an S-Corporation no income tax is paid at the corporate level, and shareholders pay taxes based on their share of profits/losses on their personal returns.
Another difference is while C-Corporations have no restrictions on ownership, S-Corporations do. S-Corporations cannot have more than 100 shareholders, and those shareholders must be U.S. residents. Also, shareholders cannot be corporations, LLC’s, partnerships, and even some trusts. Also, C-Corporations can have multiple classes and series of stock, while S-Corporations cannot.
So, while S-Corporations may provide a more tax advantageous situation, C-Corporations may provide more flexibility to you.
S-Corporations vs. LLC’s
It may surprise you to know there are many similarities between S-Corporations and LLC. For example, both limit liability of owners for the debts of the entity. Both also provide the pass-through taxation benefit.
While there are similarities, there are also some key differences. As discussed above, ownership of S-Corporations is strictly limited. With LLC’s though, there are no such limits. You can have as many owners as you want, entities can own LLC’s, and owners need not be U.S. citizens.
Perhaps the most important difference between S-Corporations and LLC’s are the differences in management. The management structure for S-Corporations is strictly defined. There is a board of directors that manages the S-Corporation, with officers handling the day-to-day work. The California Corporations Code provides defined duties and obligations of the officers and directors. With LLC’s, however, the owners have much more freedom with how the LLC will be managed. For example, it can be managed by all owners by default, or the owners can name only certain individuals as managers, or even just one manager. The owners can also customize the powers and duties of a manager as they see fit.
So there you have it. C-Corporations, S-Corporations, and LLC’s can all be great choices, but which is best for you depends on your unique facts.
Attorneys at Bremer Whyte Brown & O’Meara LLP have the expertise and experience dealing with different business litigation and transaction needs. Feel free to contact Benjamin Price with further questions at (949)449-1438.