What's the difference between an LLC, S-Corp, and C-Corp?

It’s important to start your new business off on a good note, and deciding which type of business formation is best can be a daunting task. There are three primary legal entity types most new entrepreneurs consider:

  1. Limited Liability Company,
  2. S-Corp, and
  3. C-Corp.

The latter two are both considered an “Inc.”, “Corp.”, or “Corporation”, but have major distinctions in how they operate. There is also something called a Doing Business As (DBA) designation, which is primarily used by existing businesses that want to operate under a different name.

Keep reading for more details and helpful tips, so you can make the best choice for you.

Quick Comparison Business Formation Types

LLC

Limited Liability Company
$ 129
  • Limited Liability Protection
  • Perpetual Existance
  • Pass-Through Taxation
  • Flexible Management
  • Unlimited Members
  • Can Issue Stock
  • Recognized Internationally
Most Popular

S-Corp

S Corporation
$ 129
  • Limited Liability Protection
  • Perpetual Existence
  • Pass-Through Taxation
  • Flexible Management
  • Unlimited Shareholders
  • Can Issue Stock
  • Recognized Internationally

C-Corp

C Corporation
$ 129
  • Limited Liability Protection
  • Perpetual Existence
  • Pass-Through Taxation
  • Flexible Management
  • Unlimited Shareholders
  • Can Issue Stock
  • Recognized Internationally

DBA

Doing Business As
$ 129
  • Limited Liability Protection
  • Perpetual Existence
  • Pass-Through Taxation
  • Flexible Management
  • Unlimited Shareholders
  • Can Issue Stock
  • Recognized Internationally

Important Definitions

Limited liability protection refers to the separation of your (the ownership’s) personal assets from the business’ liabilities. For a detailed explanation, see here.

In essence, it means that if someone or some entity decides they have a right to some sort of compensation, with or without merit, from the business then they are only able to reach into the assets of the business. Any assets belonging to you or other ownership can’t be touched.

It’s important to note here that the business must prove that an effort has been made to separate the assets of the business from those of the ownership. One important tool for that is an Operating Agreement which establishes the managerial and financial obligations of the owners, shareholders, or members.

Corporate formations with the state can have a “lifespan”. The majority of new formations are set to have a “perpetual existence”, meaning the entity will never expire unless it is dissolved by the managers, directors, or officers of the business.

However, there are many cases in which a new entity may choose to have an expiration date. Certain types of trusts or even temporary business ventures don’t require a perpetual existence, and all the upkeep that requires, so they set an end date.

A DBA entity is not able to have a perpetual existence, it ceases to exist when the parent entity (LLC, or Inc.) dissolves.

Pass-through taxation is a critical concept to understand when forming a new business entity with the state. See an in-depth explanation here.

Essentially, pass-through taxation means that the business entity is not taxed at the corporate level. Rather, all of the taxes on profits are paid by the members or owners when they file personal income taxes, thereby being taxed at personal/individual income tax rates.

Only a C-Corp is not eligible for pass-through taxation. C-Corps pay taxes at the corporate level on profits, and then any owners or shareholders pay personal income taxes separately.

There are many tax implications, and you absolutely must consult with a tax professional before making any important decisions. However, it is not uncommon for C-Corp owners to pay a lower overall tax rate than a comparable S-Corp or LLC owner as C-Corps do provide a lot more latitude when it comes to advanced tax planning.

Another important concept to consider when deciding on your entity type is management flexibility.

With an LLC, you can simply elect how the business is managed via an operating agreement. As long as the operating agreement is signed by all members, then it is in force and you can go about your business.

In a corporation, whether it’s an S-Corp or a C-Corp, the shareholders must elect directors to oversee officers that run the company.

Now, the shareholders can act as both directors and officers if they choose to. However, making changes requires more formality with the Secretary of State where your corporation is registered, including filing amendments and potentially other forms.

Another important concept that can often times be difficult to decide on early on in your business. 

An LLC can have unlimited members, however it cannot issue stock. A C-Corp can have unlimited shareholders, and is the preferred entity type for companies that are looking to raise outside capital from investors or potentially go public one day. 

An S-Corp can issue stock, however it’s limited to no more than 100 shareholders at any given time. 

International recognition, especially from the perspective of investors can be an important consideration.

For the most part, international investors and financial institutions will only deal with entities registered as S-Corps or C-Corps, with C-Corps being the preferred entity type for various reasons such as shareholder limits.

Free Business Name Search

This is a complimentary free name search, we’ll respond via email with any findings. This doesn’t initiate or replace a corporate filing order. 

15 minutes is all it takes, are you ready?

Launch your new business today for just $129 + state fees.