If you are thinking about starting your own business, or even if you are already working on your plan for your business, one of the first major decision to make (after the decision to actually do it) is deciding on which business structure works best for you and your business. The two most popular business structures are the corporation (C Corporation and S Corporation) and the LLC (limited liability company); each business structure has pros and cons, depending on your business needs.
Weighing the pros and cons of different business structures, particularly the LLC vs corporation (inc), does not have to be stressful. Think of this as your Spark Notes for business structure pros and cons:
The Notorious I-N-C
The C-corporation (C-corp) is what most people think of when they hear “corporation” or “inc” - the majority of large companies (Microsoft, Disney, Facebook, Nike) are filed under the C-corp structure because it offers the most asset protection and tax-related options and benefits for some business owners.
Pros
- Best option for taking a company public/issuing stock
- More attractive structure for investors
- Liability protection
- Possible lower tax rate
Cons
- Twice the Taxation (your company and your income)
- Extra paperwork
- More regulations
The option of choosing a corporation/inc versus an LLC is most attractive for business owners who may want to sell stock and have shareholders. The primary downside is what can feel like a double charge of taxes - first the corporation and then your salary.
The Less Complicated LLC
What is becoming the most popular business structure option for small business owners, the LLC (limited liability company) differs from the INC/corporation in that less paperwork is generally required and owners are spared that extra serving of taxes from the government. The LLC is widely known as a “pass-through” entity because the profits of the company flow directly to the managers/members.
Pros
- Liability protection
- Easier Set-up
- More flexible on taxes
Cons
- Self-employment taxes
- Difficulty attracting investors
- Added formation costs and franchise tax (for some states)
Different from corporations/inc, the LLC does not offer stock to the public. But at the same time, the company still has to keep some of the same types of internal paperwork as the C-corp. Some states may require LLCs to pay franchise taxes (instead of the corporate tax that C-corps pay). LLC business owners may also find some difficulty with.
S-Corp: The Almost Happy Medium
Not quite a corporation or an LLC, the S-Corporation (S-corp) is like an INC-lite: it has shareholders but has chosen to pass on its profits directly to the stockholders. It is taxed differently than an LLC but does not have the double-tax burden of the INC.
Pros
- Some degree of liability protection
- Profits pass through the company to shareholders
- Able to sell stocks
Cons
- More scrutiny from the IRS
- All owners must be US citizens
- Restrictions on ownership (limit of 100 shareholders)
The S-corp is similar to the C-corp in that it provides sizeable asset protection and tax options for business owners and can sell stocks, but also like an LLC with its “pass-through” mentality for company profits. In the debate of INC vs LLC, the S-corp may just be an ideal option for business owners who want the cake and also want to eat it too.
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