When you’re starting a new business; you want to determine the business structure that’s right for you. What’s the difference between a limited liability company (LLC) and a corporation (Inc.)? And how is a C corporation different from an S corporation?
Firstly, LLCs and corporations have some common features as they both shields personal assets from business liability and requires separation of business and personal finances. Moreover, both of the business structures are allowable in all 50 states and the District of Columbia.
Secondly, LLCs differentiate from corporations in certain points. LLCs have a highly flexible management structure and also have flexible tax reporting options. Corporations also have distinctions from LLCs such as they are preferred by outside inventors and preferred for IPO(Initial Public Offering). Furthermore, corporations are recognized outside of the United States.
After you create a corporation or LLC; you also have the opportunity to decide how you’d like your business to be taxed. Single owner LLCs can be taxed either as a sole proprietorship or a corporation. LLCs with more than one owner can be taxed either as a partnership or a corporation. Income from LLCs treated as sole proprietorships or partnerships is reported directly on the owner’s individual tax returns.
New corporations, as well as LLCs considering corporate taxation, can choose between filing taxes as a C corporation (“C Corp”) or an S corporation (“S corp”). An S corp is considered a “pass-through entity,” which means the business itself isn’t taxed. Instead, income is reported on the owners’ personal tax returns. Corporations are separate businesses entities. The profits and losses of the corporation are taxable to the corporation, not the owners (shareholders). Businesses taxed as C corporations are not pass-through entities. Income is taxed at the corporate level, and, if dividends are distributed, at the individual level as well.
After that, if the forms of those business structures are analyzed, an LLC is formed by one or more business people, as owners. The owners, called “Members,” file Articles of Organization and set out an Operating Agreement. An LLC is a pass-through type of business because the profits and losses are passed on to the Members depending on their share of membership. On the other hand, a corporation is a separate legal entity. It is formed by filing corporate organization forms in the state where the corporation is located, and by designating shareholders, each with a specific number of shares. The corporation also creates a Board of Directors to oversee the corporate business.
You can do 83(b) election in both LLC and C-Corp.
If you are planning to get investment, create a option pool, and to become a growing startup, you should choose C-Corp.
There are some key characteristic differences between C corps and S corps; however, both C designation and S designations’ owners pay personal income tax on profits. In addition to that, C designation businesses also must pay corporate income tax. Apart from that, S designation businesses have some other various features as their all business income/loss is passed through to owners each year. Besides, there can’t be more than 100 shareholders in S designations and last but not least, shareholders must be U.S citizens or resident aliens.
Finally, individuals do not have to decide about S corp status immediately. They have 75 days after the formation of their businesses to file with the IRS.