Business Entities: Which Business Types Are Right For Your Company?

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Business Entities: Which Business Types Are Right For Your Company?

Filed under: Corporations

By: Samantha Fishman

LLCs, S Corporations, C Corporations - there are so many different types of business entities, it can seem overwhelming when you're trying to decide which direction to take your company. Each of these business types has its own advantages and disadvantages when it comes to taxes, protection from creditors, operations, and other areas. So, before you make a move, remember that evaluating your needs and understanding these forms of business entities could be the difference between success and failure.

So what's a confused business owner to do? Let's take a look at each of the business entities mentioned above to determine which one best suits your needs.

Business Types: The C Corporation

C Corporations (or simply - corporations) are considered by law to be unique business entities separate from those that own it. Think of the C Corporation as an individual, who can be taxed, sued, and can enter into contractual agreements. Corporations are owned by shareholders, who elect a board of directors to oversee the major business decisions and policies. When ownership changes in a corporation, the corporation does not dissolve.

These forms of business entities have many advantages. For example, they're said to have a lower risk of government audits (as opposed to sole proprietor or LLC), owners have limited personal liability for business debts, the cost of benefits can be deducted as a business expense, there's no limit on the number of stockholders - the list goes on and on.

Business Types: The S Corporation

An S Corporation (also known as a standard business corporation) is simply a C Corporation that elects a special tax status with the IRS. S Corporations are pass-through tax entities - meaning that income or loss generated by these business entities shows up on the personal income tax return of the owners. With a C Corporation, profits and losses are taxed directly to the corporation (this can lead to double taxation.) Both business types offer the same limited liability protection and follow the same formalities, like annual shareholder and board meetings.

Business Types: The LLC

Like owners of S Corporations and C Corporations, LLCs enjoy limited personal liability. By contrast, sole proprietors and partners have unlimited personal risk. Both S Corporations and LLCs allow owners to avoid "double taxation" and to pay income taxes on a flow-through basis like sole proprietors and partners. Compared to an S Corporation, an LLC is simpler and faster to form, no annual meetings or formalities are required, members can split profits/losses in any way they choose, and an LLC can be owned by any combination of individuals or business entities. Only US citizens and resident aliens may own an S Corporation. LLCs are quickly becoming the preferred business entities among small business.

Still confused? I've found that this Business Type Comparison chart created by The Company Corporation is an excellent tool in deciding between these forms of business entities.

Different Forms of Business Entities
Business Entities LLC - Limited Liability Company C Corporation S Corporation
Ownership Rules Unlimited number of members allowed Unlimited number of shareholders; no limit on stock classes Up to 100 shareholders; only one class of stock allowed
Personal Liability of the Owners Generally no personal liability of the members Generally no personal liability of the shareholders Generally no personal liability of the shareholders
Tax Treatment The entity is not taxed (unless chosen to be taxed); profits and losses are passed through to the members Corporation taxed on its earnings at a corporate level and shareholders are taxed on any distributed dividends With the filing of IRS Form 2553, a C Corporation becomes a S Corporation, where the profits and losses are passed through to the shareholders
Key Documents Needed for Formation Articles of Organization / Certificate of Formation; Operating Agreement Articles of Incorporation; Bylaws; Organizational Board Resolutions; Stock Certificates; Stock Ledger Articles of Incorporation; Bylaws; Organizational Board Resolutions; Stock Certificates; Stock Ledger; IRS %26 State S Corporation election
Management of the Business The Operating Agreement sets forth how the business is to be managed; a Member (owner) or Manager can be designated to manage the business Board of Directors has overall management responsibility; Officers have day-to-day responsibility Board of Directors has overall management responsibility; Officers have day-to-day responsibility
Capital Contributions The members typically contribute money or services to the LLC and receive an interest in profits and losses Shareholders typically purchase stock in the corporation, either common or preferred Shareholders typically purchase stock in the corporation, but only one class of stock is allowed

If you're just not comfortable making a decision on your own, it might be worth your while to talk to an attorney or accountant about which of these business types is best for your company. Another great option is utilizing an online incorporation firm - they can answer your questions and assist you in setting up your LLC, C Corporation, or S Corporation for a pretty reasonable price.

Samantha Fishman is a web-based investor and entrepreneur. She operates dozens of sites and has an MBA in Technology Management.