How do a C corporation, an S corporation and an LLC compare?
FormationEntity choiceTax
Every one of the three protects its owners from the business's debts, and after that they part ways. The C corporation pays its own tax and can be owned by anyone, sell any kind of stock, and go public; it is the entity for a company that will raise money and pay its people in equity. The S corporation is taxed once but can have only one class of stock and a hundred US individual owners. The LLC is taxed once, can be owned by anyone, and can be structured almost any way its members like, at the cost of documents nobody has standardized and equity nobody's employees understand. The rest of this article takes the usual considerations one at a time.
Tax on profit
A C corporation pays tax on its profit, and stockholders pay again on dividends. An S corporation and an LLC pay nothing themselves; profit and loss go onto the owners' returns whether or not cash is distributed. For a business that distributes, pass-through wins. For one that reinvests, the C corporation's second layer never arrives, and its losses accumulate inside the company to offset future profit.
Who can own it
A C corporation and an LLC can be owned by individuals, funds, corporations and foreign investors. An S corporation cannot have an entity or a nonresident alien as a stockholder and cannot exceed 100. Venture funds invest in C corporations; their own investors generally cannot hold pass-through income, which rules out the LLC and the S corporation without a conversion.
Equity for the team
A C corporation issues cheap common stock to founders and employees and preferred stock to investors, and grants incentive stock options. An S corporation can grant ISOs but has only one class of stock, so it cannot price common below what investors pay. An LLC grants profits interests, which work but are opaque to most recipients, and cannot grant ISOs at all.
QSBS
Only C corporation stock can be qualified small business stock. S corporation stock never qualifies, even after the election ends. An LLC interest does not qualify either, but an LLC can convert to a C corporation and the stock issued on conversion can, with the holding period starting then.
Changing later
An LLC can become a C corporation without tax, which is why it is a reasonable starting point for a company that is not sure. An S corporation becomes a C corporation the moment it breaks a condition or revokes the election. A C corporation cannot become a pass-through entity without tax, so the decision to be one is the sticky one. Delaware charter documents for a C corporation are standardized and cheap; an LLC's operating agreement is bespoke.
Arabella forms C corporations and LLCs. We do not make S elections; a company that wants one after formation files Form 2553 with the IRS within the deadline for its first tax year.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.