I'm starting a real business...
Should I form a Corporation or an LLC?
C corporation is a for profit corporation taxed under the normal corporate income tax rules. Every state allows a one person corporation
Comparing Corporations to LLC
Both have limited liability protection from personal liability for debts and claims of the business
Corporation
- A corporation is a legal and tax entity separate and apart from its owners
- With a corporation there is limited liability protection from personal liability for debts and claims of the business
- With a corporation you have to adhere to certain rules, otherwise you risk losing your personal liability protection (also called piercing the corporate veil). These include, but are not limited to:
- Prepare and update By-laws
- Keep minutes of shareholder and board meetings
- Maintain current and accurate shareholder records
- A corporation is a separate taxable entity
- A corporation can choose any number of shareholders and directors it wants (S corporations are limited to 100 shareholders)
- All shareholders need to be citizens of the U.S or residents
- A corporation has unlimited (perpetual) life
- Directors must be individuals
LLC
- Every state allows a one person LLC
- With an LLC, any person or entity can become an LLC member (owner)
- Other business entities like a corporation or another LLC can be an owner of a LLC
- An LLC is not a corporation, but it has many of the same benefits
- With an LLC there is limited liability protection from personal liability for debts and claims of the business
- An LLC is easier to operate, is less complicated and has less paperwork
- An LLC has pass-through taxation-the profits of the business are taxed on your individual tax return
- An LLC has flexible management and ownership structures
- An LLC does not necessarily have unlimited (perpetual) life
- An LLC can elect corporate tax treatment by filing IRS Form 8832 Entity Classification Election
Comparing C Corporations to S Corporations
- Every state allows a one person corporation
- Corporations have unlimited (perpetual) life
- All shareholders have limited personal liability protection from the corporate debt and claims
- Both have limited liability protection from personal liability for debts and claims of the business. However, you have to adhere to certain rules, otherwise you risk losing your personal liability protection (also called piercing the corporate veil). These include but may not be limited to:
- Prepare and update By-laws
- Keep minutes of shareholder and board meetings
- Maintain current and accurate shareholder records
- C corporations are more flexible
- There is no limit on the number of shareholders (owners) and directors
- C corporation is taxed under normal corporate income tax rules. The owners pay individual income tax on salary they receive and the corporation pays taxes on the net profits that remain in the business
- You can issue more than one class of stock. All shareholders need to be citizens of the U.S. or residents
- C corporations are better if you need venture capital
- S corporation has the pass-through tax treatment (similar to a partnership)
- You need to initially file as a C corporation and then covert the corporation to an S corporation by completing the IRS form 2253, so there is more paperwork and time involved
- S-Corporations cannot have more than 100 shareholders and cannot make a public offering of its shares. All shareholders need to be citizens of the U.S. or residents
- S Corporations have a pass through tax. As a legal tax entity, the corporation files its own tax returns and pays taxes on profits that are left in the business, thereby avoiding “double taxation”
- You are limited to issuing one class of stock. Not having the ability to issue different classes of stock affords a business less control over the company and limitations on the stock value
- S corporation is not as attractive to outside investors. Money. Venture capitalists will not want to see the pass through tax setup or a limit of 100 shareholders