How to Choose between a C Corp, S Corp or LLC
How do you choose between a C Corp, S Corp or LLC?
Are you wrestling with the idea of creating a legal entity to protect your assets but not sure which one is best? The solution is to talk to your attorney and get proper legal advice and your CPA to get the right tax advise but here is some information to help focus your talking points.
As you work through your options, do not forget. You can avoid the costs, spending your time plus the initial and ongoing paperwork hassles by operating as a sole proprietor and buying insurance to manage some of your risks. However, if you would like to know your choices and differences between the three main legal entity options available to you, here is a quick summary and comparison to consider. This is not legal advice. Please get that from your attorney.
|LLC||S Corp||C Corp|
|Ownership options||No restrictions including citizenship requirements||Must be resident and US Citizen||No restrictions including citizenship requirements|
|Maximum 100 members|
|If ownership formalities violated cannot hold an S Corp for a number of years|
|Formalities including paperwork and meetings||Few||Many||Many|
|Tax liability when winding up||Once||Once||Twice|
|Taxation||Not subject to double taxation||Not subject to double taxation||Subject to double taxation|
|Maintenance||Fewer formalities||Follow formalities or corporate veil can be pierced||Follow formalities or corporate veil can be pierced|
|Shares into a Trust||Easier than S Corp||LLC is easier|
|Unemployment taxes on income||None payable||Due and payable||Due and payable|
|Self employment taxes on profit||Yes||No|
|Self-employment tax on salary||Yes||Yes|
|Self-employment tax on dividends||No|
|Fringe Benefits||Taxable||Taxable||Non taxable|
|Income recognition||Cannot be delayed||Cannot be delayed||Can be delayed|
Most business owners start as a Sole Proprietor or Partnership so they can test their business concept, see if they have the skill and interest to continue as an entrepreneur and/or save some of the expenses filing a legal entity. Once there is confidence the business has a future the owner(s) look at their legal entity options to create a layer of legal protection and be more tax efficient. As you can see from the above, there is “no one size fits all.” Each entity has subtle differences. These differences apply with each State in the US. To learn and then decide which entity is right for you, talk to your attorney and/or tax advisor.
If you would like a bit more information about different legal entity options, click this link as it may help you with Which legal structure is right for my business.
If you have questions about selling a business or buying a franchise, give me a call on 916 570-2674.