Staying on top of the various types of business structures isn't easy.
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To the uninitiated, S corps, C corps, and LLCs look a lot alike. But in fact, they are very different in the way they treat income, pay taxes, and solicit investment capital.
- C Corporations or "C corps" are the most widely recognized of the three business structures. A C corp is a business entity that is governed by a board of directors, but enjoys its own legal and taxable status apart from its shareholders. C corps are also the only type of companies that can sell publicly traded stock.
- S Corporations or "S corps" are incorporated entities that exhibit many of the same characteristics as sole proprietorships and partnerships, at least in the way that they handle taxable income. Even though S corps are subject to specific corporate regulations, many business owners like this business structure because it offers them a combination of incorporated benefits and small business maneuverability.
- Limited Liability Companies or "LLCs" are similar to S corps except for the fact that they are not an incorporated business entity. These are highly flexible, unincorporated associations that can be adapted for a variety of circumstances and business strategies.
It's important to know that all three business structures offer a level of liability protection for owners and/or shareholders. Even though that liability protection may not be ironclad (especially in an LLC), they all protect shareholders much better than a sole proprietorship or partnership.
Here are some other noteworthy differences between C corps, S corps and LLCs:
- Income taxes. LLCs and S corps are described as "flow through" business entities. In a C corp, the corporation itself pays tax on net income. But in a flow-through entity, income (and losses) flow through to the shareholders and are reported on their personal income tax returns. As a consequence, both S corps and LLCs make it possible for business owners to offset personal income with business losses.
- Double taxation. In LLCs and S corps, income is only taxed once, on the owners' personal returns. But in a C corp, income has the potential to be taxed twice: At the entity level, and then again when dividends are distributed to shareholders.
- Investment. The ability to attract investment is the gamechanger that makes C corps and even S corps attractive options. VCs and other investors often avoid investing in LLCs, preferring instead to sink their dollars into formally incorporated companies. Likewise, if taking your company public is part of your business plan, regulatory requirements demand that you adopt a C corp business structure.