LLC vs S-corp vs C-corp: What is the Best for Small Business?

Cody Cromwell
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What Exactly is an S-corp?

S-corporations are owned by shareholders (i.e. the owners). A S-corp enters into a revocable trust with its shareholders, known as a "trust agreement." The shareholders who own the S-corp are the beneficiaries of the trust.

The shareholders of an S-corp are known as "members" and are given all profits and losses. While an S-corp is taxed as a pass-through entity, the shareholders should report and pay extra income tax on the S-corp profits.

S-corps can have only one level of ownership, but they can elect to be owned by more than one member with specific percentages. For example, an S-corp can elect two members to own 50% and 50% of the S-corp. This is referred to a "joint adventure."

Why Elect the S-corp Tax Status?

Your small business may be tax-exempt at levels much greater than the conventional, sole proprietor or unlimited liability company (S-corp and C-corp). The benefits of setting up your business as a Limited Liability Company (LLC) lie in the protection of personal assets from your business’s liabilities. In addition to being tax-exempt, LLCs can also provide limited liability protection to the company’s owners and their families.

The major benefit of being a S-corp or a C-corp is that if the company has net losses in excess of the tax benefits, the losses can be deducted from taxable income.

So LLCs provide two main tax benefits for your business:

It is a general Tax-Exempt Entity (ETE). This means that business income, such as sales, will not be taxed, or will be taxed at the lower rate for small businesses. (Note: it is still necessary to file a tax return and pay tax on the business income.)

Which Business Structure is Right for You?

Question 1

Does a LLC keep me from having employees?

No. One of the great things about having a limited liability company (LLC) is that not only can you have employees, you can have highly successful employees and still have protection from personal liability. Personal liability is a fact of life. Let’s say you have an LLC with one of your family members who needs to go visit her mom in the hospital. Mom has an accident and sues you for negligence. If you are personally liable for your family member’s actions, the lawsuit will affect your personal assets, including your car, home, friends, bike, and anything else you own. In an LLC, this will not occur because you are not personally liable for anything your employees or family members do while working for you.

Question 2: Does a LLC keep my employees protected?

Yes. In the same way that you are protected when your family member is injured while working for you, your employees will be protected when they injure someone while working for your company. In most cases, an injured person wouldn’t be able to sue your company directly for their injuries, they would have to sue you or your company to get at your employees’ assets.

Are you hiring employees?

There are three main business entity structures that are commonly used to form and manage a small business … the proprietorship, the partnership, and the limited liability company. However, if you’re running a small business, there are some added tax and financial planning considerations that are unique to LLCs and S-Corps.

In this post, we’ll look at the main differences between each business structure.

One of the most common reasons to form a small business is to have the flexibility to add and remove team members in the future. These added benefits of flexibility and the right to add an unlimited number of additional team members in the future are the primary reasons to use an S-Corp or LLC over a Partnership. Another important difference is that you can now add employees to your LLC, which Partnership companies can’t.

Current and retired entrepreneurs recommend LLCs and S-Corps because they believe these are the optimal structure for many small businesses.

Question 2

What is the best type of business to register for?

Bottom line answer: It depends on the situation. This is a case of many factors, including your individual needs, goals, and income.

There is a lot to be said about what type of business entity you should use. There are a lot of claims and a lot of information to digest that can complicate matters, so it’s not unreasonable to take a moment to think about the question completely before making a decision.

Let’s take a moment to examine the intricacies of the LLC and the different types of business entities. The objective is to educate the reader on making the best choice for a business entity in terms of registration, growth, and income.

There are three types of business entities, including the sole proprietor (or sole proprietorship), the general partnership (or general partnership), and the limited partnership (or limited partnerships). A sole proprietorship means each owner is personally liable for the business debt or other liabilities. On the other end of the spectrum, limited partnership business owners are not personally liable for any business liability. An LLC is a hybrid type of business entity that is somewhere in between a partnership and a sole proprietorship.

Traditional types of business consist of joint companies, limited companies, professional practice businesses (or PBO), and the partnership.

How possible is it that a customer, employee, or vendor could sue your business for wrongdoing?

Question 3

After paying monthly expenses and yourself a reasonable salary, will your business likely have profit remaining?

Most new business owners do not have the answers to this question. This is because this is the wrong question you must be asking. The money you invest in your business should be enough for your living expenses and not much more. On a side note, this is what happens when you are willing to work without much help from others.

So if you have your living expenses covered and anything left over in your pocket, you now have the option of investing that money and making it work for you with the most ideal way of doing business … that is by employing another person in your business. You will be facing a lot of questions and have to make a lot of decisions when you have to employ someone to work with you. One of the questions you have to answer is the type of business entity you want to create.

I assume roughly you have not considered this question a lot or at all. This is why you just started a small business. Here is what you need to consider.

You can create an LLC or an S-corp. You can also combine LLC with S-corp. There are also corporate structures between these two business forms.

Here’s a brief explanation on LLC:

Question 4

Do you have any bad performances that you want to erase from the books? How do you feel about lying to your accountant about those results to bring in more cash or to stay on the right side of the IRS?

When I speak to small business owners, I am always struck by how many are open about maintaining a diary of their successes and failures in their business. The simplest approach is to compare opening and closing statements and profit and loss statements. This approach is particularly useful if you want to show how you run or manage a business. An accounting system can have this information loaded automatically, and the information can be exported in an easily digestible form, and it is only a couple of mouse clicks or keystrokes away.

Although it is important to keep records for credibility, it should never come at the cost of actual events. Therefore, you must be extra careful to understand that you are not encouraging or enabling your accountant to conceal or downplay the events. If, during the accounting process, you have an issue where you need to disclose an embarrassing or incriminating event, you might consider using an LLC instead of a corporation, or offering prior financing by an S-corp.

However, these are not appropriate for every circumstance. If you are just an individual, or have no chance of external financing or a hefty amount of stock, then it is best to keep your company as a C-Corp.

If you do have profit remaining after paying expenses and your salary, would you prefer to pay yourself more or keep profits in the business?

If you pay yourself a salary, you won’t have to start over from scratch in order to pay yourself more when your business grows.

If your goal is to keep money in the business in order to grow it, an S-corp could be the best choice.

If you want to keep your business as simple as possible, an LLC gives you the most flexibility.

Because small businesses are limited by how much money you can invest in them, in order for you to grow your business, you need to reach a certain level of profit.

If you have enough money to reinvest in your business, an S-corp is the best choice.

If your goal is to keep the business as simple and as hassle-free as possible, an LLC offers a lot of flexibility.

Since you have to set aside a certain amount of income for taxes, an LLC may not be best for you if you think you may need to invest more in the future.

If you have a lot of money to invest in the business, you may want to consider an S-corp.

If you do have profits remaining after paying your expenses and your salary, you may want to keep those profits in your business to invest in growth.

You may be more inclined to keep profits in the business in order to pay yourself and reinvest in it.

When to Choose an LLC Rather Than an S-Corp

If you’re a small business owner, you may be wondering which type of entity you should use for your business, namely an LLC or S-corp or C-corp. These are three of the most common business structures, but they have their respective pros and cons.

Below, we’ll go through each of them and offer advice on which one you should consider. Then, we’ll highlight why you should use an LLC instead. Lastly, we’ll talk about some of the differences between different types of LLCs and what really matters for your small business.

Benefits of an LLC

Disadvantages of an LLC

LLCs have several disadvantages for small business owners. One of the major disadvantages listed is the fact that an LLC is totally tax-dependent on its members and owners. LLCs are not structured like a corporation which consist of warehouses and factories. They are created upon agreement from the members. So, each member have to pay taxes on their individual income and profits.

Next thing, the main income and profits are taxed as a personal tax. There is no any room for business expenses inside the business. On the other hand, LLC may be limited in the number of members which may lead to massive salaries.

Disadvantages of an S-Corp

You might be thinking to yourself that S-corp is similar to LLCs. Well, they are similar, but not exactly the same. S-corp gives its owners more maneuverability. They can either pay a larger amount of money as an entrance fee or share an equal portion of the profits with the business. However, an S-corp is a different entity from the individual owners.

Identical directors or shareholders can be found in an S-corp. So, the tax burden is shared by the number of shareholders. They may even outsource their salary and tax filing to an accounting firm.

They also have some advantages like paying S-corp owner’s salary at the estimated payroll taxes, rather than how much they actually pay.

LLC vs LLP

Why Choose a C-corp?

C-corps are the "small business corporations" in the business world. The most talked about advantage of this corporation type is the central management. A C-corp gives the business an ownership stake in itself, while allowing it to pay lower taxes.

The can be incorporated as individuals, but it is most often done by a small team. In most cases, the founder and first employees are the individuals who incorporate the business. For newer business owners who are unsure of how to set up their business, it is ideal for this type of business. A C-corp is also ideal for when you want to separate ownership from taxation.

A single institutional investor or corporation can own a majority of the stock. In such a case, the company is considered to be an S-corp. An S-corp has more stringent rules about how shareholder compensation can be paid versus the more fluidity of C-corps.

S-corps have complicated rules regarding how stockholder compensation can be paid. It is more difficult to structure an S-corp than a C-corp, and is not used by most business owners.

Benefits of a C-corp

For small businesses that want to limit their exposure to tax liability while taking the first steps towards tremendous growth, a c-corporation is an ideal entity.

C-corps are corporations that until 2004 were treated as partnerships and were taxed as such. Now c-corporations are allowed to elect to be taxed as a C-corporation. This gives them certain benefits that other corporations cannot enjoy.

Mainly, c-corps reaps the benefits of being categorized as a corporation but with compatibility with being a partnership entity. The most distinguishing feature of a c-corp is its ability to have both unlimited personal liability and that of members.

In an s-corporation, you’re personally liable for any shareholder debt. You do have the option to take out personal loans to repay the debt like a sole proprietor, but the sole owner and owner of all of the liability.

In a c-corporation, the shareholders may elect to be liable, while the other owners are not subject to personal liability. However, because it is a corporation, the shareholders are required to place financial statements and other financial information through tax returns and otherwise. Not all of this information may be accessible to the public like it is in s-corporations.

Disadvantages of a C-corp

While the C-corp, an S-corp, and an LLC may seem interchangeable, each type has advantages and disadvantages. If you’re looking to open a business, you will want to make a decision carefully based on whether opening a C-corp, an LLC, or an S-corp is the best solution for your business.

The chart above indicates the main differences between each type.

Alternatives to the LLC, C-corp, and S-corp

Sole Proprietorship

Partnership

Or LLC?

LLC vs S-corp vs C-corp: What is the Best for Small Business?

Forming an LLC in Missouri is as simple, quick and straightforward as forming a corporation, and with only a minimal fee. What does that matter? It tends to make the cost of doing business effective, making it an important factor in the choice of your business structure. Another thing worth noting is the fact that the LLC has no limited partners. You are an employee, and as such, the LLC is not responsible for the business activities that were your responsibility.

The S corporation, on the other hand, is the best choice in terms of the number of shareholders. It is also the best when it comes to the setting of your tax bill. As an S corporation, your corporation is responsible for paying your own tax. So, the lower your profits are, the lower your tax burden will be.

On the other hand, C corporations are the most expensive, in spite of the fact that they tend to have larger profit. The S corporation will be preferred if profits are relatively small and you are wondering whether there is any way to avoid the C corporation tax on profits 25%.

The most important factor in choosing the corporate form of your business is to select the one that fits your needs best. That requires a consultation with a lawyer who specializes in business forms.

Bottom Line

LLC or S-Corp or C-Corp

When self-employment taxes are part of an equation, you must consider whether you should form an LLC, form an S-Corp, or form a C-Corp. This is a very important decision as self-employment taxes are a major expense for an LLC and C-Corp. But there are some other benefits to forming an LLC for your business.

Unfortunately, it is not the right choice for every type of business. If you have ordinary assets and you don’t plan to make distributions, opt for an S-Corp or C-Corp.

On the other hand, if you want to protect certain income streams form creditors, it may be best to form an LLC with limited liability. Here are the points you need to think about to determine what is best for your business.