How to Select the Right Corporate Entity for
You and Your Business

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Today there are three primary forms of corporate entities: the C-Corporation (also called C-Corp.), the S-Corporation (S-Corp.) and the relatively new Limited Liability Company (LLC).

While selecting a corporate entity can be relatively involved and complex, LLC Publishing is here to handle the entire process for you and help you concentrate your energies on building your business and making more money.

Here are the simple fast facts and key concepts you need to know to help you determine which corporate entity could be the optimal fit for your business.

This article focuses on the three main types of entities: the S-Corporation or S-Corp., the C-Corp., and the Limited Liability Company or LLC. The ‘S’ and ‘C’ in S-Corp. and C-Corp. respectively, refer to chapters in the Internal Revenue Code or IRC.

This article is designed to help you learn more about each of these entities and make more informed decisions about your business and its legal structure, but this article is not intended to be definitive or a substitute for legal counsel. To make the best decision for yourself and your business, be sure to consult your professional advisors.

 CLICK HERE for CORPORATE ENTITY FACTS AT A GLANCE

C-Corporation or C-Corp.

Typically, companies that trade on an organized stock exchange are C-Corporations. The C-Corporation is owned by stockholders (which can be unlimited in number) who elect directors to the Board of Directors. The Corporation can sell shares of stock (common or preferred) to raise capital (money) to fund its operations. Stock certificates are relatively easy to transfer and this is especially the case if the Corporation is publicly traded on an exchange such as the New York Stock Exchange (NYSE). The Corporation can sell products and services, buy real estate, enter into contracts, and sue and be sued, and the owners (stockholders or shareholders) bear no personal responsibility for the actions of the company executives.

At minimum, an annual Directors and Shareholders meeting must take place, where major decisions are recorded, and the company’s results of operations must be reported at least once per year and often every quarter. The company’s Corporate Bylaws govern the company’s major activities. The C-Corporation has an unlimited life, separate from the illness or death of any owners. In other words, when the founders or even a major or controlling shareholder dies, the Corporation’s existence continues.

Main Advantages to C-Corporations:

• Limited personal liability for debts; in other words, the shareholders cannot be held liable for the company’s debts and other obligations. The shareholders losses are limited to their investment, for example, the amount of money they purchased their stock.

• The Corporation can take a tax deduction for fringe benefits (healthcare, travel and entertainment) as business expenses (vs. LLC’s and S-Corps. which cannot).

• C-Corporations have the ability to split (allocate) profits between owners (shareholders) and the Corporation, thereby lowering the Corporation’s overall tax rate.

Main Disadvantages to C-Corporations:

• Double taxation of profits when dividends are distributed to shareholders. For example, when a Corporation makes money (turns a profit) it can retain the cash to fund operations or distribute some or all of the cash as dividends to the shareholders. When a Corporation earns a profit (sales revenue minus its expenses), the Corporation pays income taxes on those profits. When the Corporation pays a dividend to its shareholders, the Corporation does not receive a tax deduction for its dividend payments. But, the shareholders who receive the dividends are required to declare the dividends on their tax returns. Hence, the concept of “double taxation.” The Corporation pays taxes on its profits and then the shareholders pay income taxes on the dividends they receive.

• C-Corporations are generally more complicated to run and manage than other corporate entities, for example an LLC.  A C-Corporation is treated as a “separate person” for income tax purposes by the IRS and the Corporation must file income tax returns (IRS Form 1120). On the other hand, an S-Corp. files an information return known as IRS Form 1120S and the owners (individuals) report their pro rata share of the S-Corp.’s income and losses on their tax returns. 

 CLICK HERE for CORPORATE ENTITY FACTS AT A GLANCE

S-Corporation or S-Corp.

An S-Corporation is a Corporation that stands alone from its owners for liability purposes but is also known as a “pass through entity” because the S-Corporation does not pay income taxes on its profits but rather passes through those profits to its shareholders. Then each shareholder reports his or her share of the S-Corp.’s income and losses on his/her individual income tax return. The S-Corporation is owned by a limited number of stockholders (maximum 75). The stock is easily transferable and can be sold to raise capital but must be within IRS guidelines. Like the C-Corp., at minimum an annual Directors and Shareholders meeting must take place, where major decisions are recorded, and the results of operations are reported at least annually, or as is dictated by the Corporate Bylaws. The S-Corporation has an unlimited life, separate from the illness or death of any owners.

Main Advantages to S-Corporations:

• Limited personal liability for the S-Corp.’s debts.

• No taxation of profits to the Corporation. The S-Corporation’s profits are not taxed at the corporate level like the C-Corporation. Instead, profits and losses are passed through to the shareholders, who report their share of the S-Corporation’s profits on their personal tax returns. Shareholders can offset profits from one S-Corporation against losses from another S-Corporation. The S-Corporation prepares an information tax return known as a Form 1120S and also prepares a Form K-1 for each shareholder. For example, if there are 10 individuals who own equal stakes in the XYZ S-Corp., and the S-Corp. earns a profit of $200 this year, each shareholder would receive a K-1 that allocates 10% of the S-Corporation’s income (profit) to him/her, or $20 (10% of $200).

• S-Corporation Owners may receive some income tax deductions for certain business expenses.

Main Disadvantages to S-Corporations:

• An S-Corporation must distribute its income to the shareholders in accordance with the owners’ ownership interests.

• An S-Corporation is typically more complicated to run and manage than an LLC.

 CLICK HERE for CORPORATE ENTITY FACTS AT A GLANCE

Limited Liability Company or LLC

An LLC is a Limited Liability Company and is similar in many ways to an S-Corporation, but the LLC is more flexible and faces fewer rules and regulations. Each LLC member (owner) pays income taxes on his/her share of the LLC’s profits at his/her own individual tax rate.  For this reason, the LLC is also a “pass through entity.”

LLCs must file an operating agreement with the Secretary of State in the State in which they establish their LLC. The operating agreement outlines the management and guidelines of the Corporation. The requirements are dependant on the particular requirements of the State in which the LLC is filed.  The operating agreement governs raising capital, transfer and selling of shares.

There are no shares of stock; the LLC issues member [ownership] units or interests; however, LLC owners have the same advantage of limited personal liability for company debts as with the C-Corp.  If the company is sued, only business assets, not members’ personal assets, are at risk. Like a Corporation the LLC is a separate business entity. It is possible for members to sell or transfer their interest(s); however, any sale or transfer is subject to any restrictions that may be in the operating agreement.

Main Advantages to LLC Members:

• Limited personal liability for the LLC’s debts.

• No taxation at the corporate level. The LLC passes income and losses “through” to the LLC members who report their share of the LLC’s profits and losses on their personal tax returns, enabling them to offset losses from other LLCs.

• LLCs are not typically limited in the number of members the entity can have.

• LLCs are less formal and easier to manage and require less paperwork and administrative duties than the S-Corp. and C-Corp.

• Flexibility in company structure and management – self-governing operating agreement.

Main Disadvantages to LLC Members:

• Harder to transfer ownership than with an S-Corporation or C-Corporation.

• As the newest business structure, there are fewer laws governing the LLC’s management, operation and maintenance; and fewer established precedents exist.

There are numerous sound reasons to select one form of corporate entity over another, but once you decide to start your business, it’s often wise to incorporate your business. Incorporating offers many benefits and opportunities, including branding, capital raising. And of course, protecting yourself and your family from liability.

At LLC Publishing, our Team of Incorporation Specialists is waiting for your call. We have over 10 years of business and corporate experience and look forward to helping you launch your business and achieve the success you desire.