Most people have heard of the three most common business structures: an LLC, a C corporation, and an S corporation. But if you’re just starting out and don’t know what they are or how they differ from one another, it can be hard to know where to start.
This is precisely why I wrote this guide. A lot of people get confused by corporate tax structures in their first year of business because they’re not sure how each type of entity works or what their pros/cons are.
In this article, we’ll discuss the differences between these three common types of corporations so that you can make an informed decision about which one is right for your business!
What is the difference between an LLC, a C corporation, and an S corporation? A Comprehensive Guide
What is an LLC?
An LLC is a limited liability company. It’s a type of business structure that combines elements of corporations and partnerships, with many benefits to both parties.
The LLC is a hybrid entity, which means it’s treated as a separate entity for tax purposes but not necessarily for other legal purposes (like liability). This gives you the option to decide whether or not you want to be treated as an LLC for all purposes depending on what makes sense for your situation.
In addition, the LLC has more flexibility than corporations and sole proprietorships in terms of management structure (no board), operating agreements, and more flexible capitalization requirements.
What is a C corporation?
A C corporation is a separate legal entity, meaning that it’s not owned by the owner of the company. It’s taxed separately from its owners, which means that it has to pay federal income tax on its own income.
When you make money in a C corporation, you’re paid as an employee and then your salary is taxed at the corporate level before being distributed to you as dividends or profits.
What is an S corporation?
An S corporation is a structure that allows you to avoid double taxation. That means you can pay taxes on income at the business level, but not at the personal level. You’ll be taxed only on your net income and not on your gross receipts or sales.
The corporation itself isn’t taxed at all: instead, it passes its net profits through to shareholders in proportion to their ownership stakes in the company (typically by issuing them stock dividends). Then, those shareholders pay taxes on those dividends at their individual tax rates, which may be lower than they would have been if they had been operating as an LLC or sole proprietorship.
There are different business structures you can choose from when starting a new business.
Before you start a new business, you might be wondering: What are the different types of business structures? There are three main types: LLCs (limited liability companies), C corporations, and S corporations. Each one has its own pros and cons.
The most popular type of structure is an LLC, around 70 percent of all businesses fall into this category. An LLC is known as a pass-through entity because it passes profits and losses through to the owners’ personal income tax return using Schedule C or Schedule F. The advantage of an LLC over other structures is that it offers greater flexibility than corporations but shields owners from potential liability for business debts or lawsuits without the need for excessive paperwork or complexity that comes with incorporating a corporation.
Because it doesn’t have to follow strict formalities around board meetings and minutes like corporations do, an LLC may also save you time and money overall in terms of administrative costs when compared to incorporation options like S corporations or C corps (although these entities offer additional confidentiality benefits).
In addition, due to their flexibility in terms of management style and ownership structure, in particular, if they’re run by multiple partners rather than just one person, LLCs are often better suited for startups whose success depends on having strong leadership but who aren’t interested in growing too large too fast (or at all).
Now that you have the information you need to make the best decision for your business, what are you waiting for? Make sure to talk with an accountant or lawyer before choosing a business structure so that they can help guide you through the process and make sure everything goes smoothly.