Comparing types of businesses

S corporation business type

Once you’ve formed a corporation with the state, you can elect S corporation tax status by filing a form with the IRS. With an S corp, profits, losses, and other tax items pass through the corporation to shareholders and are reported on personal tax returns. (The S corporation does not pay tax.) 

An S corporation might be the right business type for you if want/need

• Benefits that the corporate business type holds (outlined above), but you want to take advantage of pass-through taxation

Learn more about forming an S corporation

Limited liability company (LLC) business type

The LLC is another business type that is formed under state law that gives you personal liability protection. Tax-wise, an LLC is similar to an S corporation, with business income and expenses reported on your personal tax return. If you are the only owner of an LLC, you are viewed as a disregarded entity. This means you report the LLC’s income and expenses on Schedule C of Form 1040 — the same schedule used by sole proprietors.

An LLC might be the right type of business for you if:

• Your startup company anticipates losses for at least two years and you want to be able to pass the losses through to yourself and the other members. (In an LLC, the owners are called members.)
  
• Flexibility for accounting methods is desired. (LLCs are not required to use the accrual method of accounting as C corporations typically are.)
• Your business owns real estate
• You want management flexibility. (LLCs offer more flexibility than corporations in terms of how the management of the business is structured.)
• You wish to minimize ongoing formalities. (Corporations are required to hold annual meetings of directors and shareholders and keep detailed documents and records for all corporate meetings and major business decisions. LLCs do not face strict ongoing meeting and documentation requirements.)

Learn more about forming an LLC

Comparing C corp, S corp, and LLC: At a glance

• C corporations, S corporations, and LLCs provide limited liability protection for the personal assets of the owner(s).
• S corporations and LLCs are commonly used for small business activities. Both business types enable you to grow your business and take on new owners.
• S corps and LLCs pass-through income to owners who report it on their personal returns.
• S corporation shareholders (if they work for the business) are employees of their corporation. Social Security and Medicare (FICA) taxes apply to compensation they receive, but not to distributions they receive.
• LLC members are self-employed individuals who owe Social Security and Medicare taxes, paid by self-employment tax on their share of business net income.
• C corps, S corps, and LLCs offer varying tax advantages such as tax deductions that are not available to sole proprietors.
• C corps, S corps, and LLCs provide an opportunity to gain credibility with potential customers, vendors, partners, and employees.
• Capital can be raised more easily with a C corp or S corp.

Other considerations: State selection

Most people opt to incorporate or form an LLC in the state in which their business operates. However, you are not required to do so. You can choose from any one of the 50 states or the District of Columbia (DC). You may want to consider which state is right for you by weighing any potential advantages or disadvantages.

Remember, if you incorporate in a state other than the state where you operate your business, you may be required to register to transact business (foreign qualify) in the state where you operate. This means paying registration and ongoing fees and taxes to both the state of incorporation/formation and state of qualification.

Choosing a business entity type

The decision to form a corporation or LLC depends on your particular business situation and goals. When evaluating whether to file a DBA, existing corporations and LLCs in particular may need to consider the following.

• Does the new name project a business focus that is allowed under the business purpose (as outlined in your Articles of Incorporation or Organization)?
• Are there advantages to creating a subsidiary or an entirely new business to operate alongside your existing business?

For questions regarding your specific situation, consider talking with an attorney or accountant.

As you decide which business structure is best for you, try our Incorporation Wizard to compare which business type may be best for you.

Related articles

Understanding how to create an LLC (advantages and disadvantages)

Compare LLC vs. Inc.: Understanding the key similarities and differences between LLCs and corporations

Guide to incorporating your business