Entrepreneurship
LLC, S Corp, C Corp: Which one is right for my startup?
Hyperspace Ventures
Mar 1 2023 · 1 min read
When starting a business, one of the most important decisions you need to make is choosing the legal structure of your company. There are three common types of business structures: LLC, S Corp, and C Corp. Each structure has its own set of pros and cons, which are outlined below:
LLC (Limited Liability Company)
Pros:
Pass-through taxation: Profits and losses pass through to the owners' personal tax returns, so the company itself doesn't pay taxes.
Limited liability: Owners are not personally responsible for the company's debts or legal liabilities.
Flexibility: LLCs are relatively easy and inexpensive to set up, and offer a lot of flexibility in terms of management and ownership structure.
Cons:
Self-employment taxes: LLC owners are responsible for paying self-employment taxes on their share of the company's profits.
Limited life: In most states, the LLC's life is limited to a certain number of years or the life of the owners.
S Corp (S Corporation)
Pros:
Pass-through taxation: Profits and losses pass through to the owners' personal tax returns, so the company itself doesn't pay taxes.
Limited liability: Owners are not personally responsible for the company's debts or legal liabilities.
Reduced self-employment taxes: S Corp owners can take a salary and the rest of the profits as a distribution, which is not subject to self-employment taxes.
Cons:
Limited number of shareholders: S Corps can only have up to 100 shareholders, all of whom must be U.S. citizens or permanent residents.
Strict ownership rules: S Corps have strict ownership rules and require shareholders to be treated equally.
C Corp (C Corporation)
Pros:
Limited liability: Owners are not personally responsible for the company's debts or legal liabilities.
Unlimited number of shareholders: C Corps can have an unlimited number of shareholders, including foreign nationals and other corporations.
Attractive to investors: C Corps are often the preferred structure for venture capitalists and other investors, as they offer the most flexibility in terms of ownership and management.
Cons:
Double taxation: C Corps are subject to corporate income tax, and profits are taxed again when distributed as dividends to shareholders.
Complex governance: C Corps have more complex governance requirements than LLCs or S Corps, including the need for regular meetings and keeping detailed records.
Choosing the right business structure is a critical decision that can impact your taxes, liability, and flexibility as a business owner. It's important to consult with a lawyer or accountant to determine which structure is right for your business.
