What is the difference between llc c and llc s

As companies become more complex and profitable, partnerships and proprietorships tend to be less suitable. Enter S Corporations. S corporations are a very popular entity choice for small and mid-sized privately held companies. S corporations and partnerships still file a tax return, but no income tax is owed on the return.

The tax return simply shows the taxable income of the company and allocates it to the owners on a Form K Sole proprietorships do not file a business tax return at all. Why is pass-through status such a big deal? That is not true of C corporations coming up next.

If a partnership is a pass-through entity just like an S corporation, why is the S corporation structure typically preferred? The answer is FICA tax. S corporation owners are required to pay themselves a reasonable wage which is subject to FICA tax , but the remaining business profits are subject only to income tax, not FICA tax.

The chart below shows how moving from a partnership to S corporation status would save the owner approx. S corporations also generally have stricter rules than the other entity types.

For example:. On a practical note, I find many business owners struggle to understand the S corporation concept and the pass-through concept in general. It can be confusing to owe personal income tax on S corporation earnings when the owner has not received those earnings in cash. The inverse relationship between owner wages and taxable business profits can be confusing as well. This naturally increases the associated costs, both for setup as well as ongoing maintenance.

Forming first as an LLC coming up soon and electing S corporation tax status, is an option to reduce some of the administrative burden. As businesses continue to get bigger and more complex, they may outgrow the S Corporation structure. If the number of investors exceeds the shareholder limit e. Enter the C Corporation.

All large American publicly traded corporations are C corporations. It is the only entity form that works for them. Privately-held C corporations are rare and typically have chosen the structure for reasons other than income taxes. One group of companies that utilize the C corporation structure are high-growth startups seeking series funding.

They are forced to go this route because their target investors may be entities or foreign individuals, neither of which are allowed to invest in an S corporation. It is common practice for C corporations to register in the state of Delaware. Delaware has well-defined and court-tested corporate regulations and has become the state of choice for incorporation. C corporations are unique in that the corporation pays its own income tax. The big drawback to the C corporation structure is that stockholders of a C corporation generally must pay tax on the dividends they withdraw from the corporation.

Essentially the C corporation pays tax on its income first, and the remaining money is distributed to the owners, who pay tax on it again. This is referred to as double taxation. The double taxation of earnings is what keeps most private firms away from C corporation status. That can be a relatively big deal for certain private stockholders.

There is a school of thought that suggests that despite double taxation, the C corporation structure can still be tax-efficient even for small private companies. This strategy is geared toward companies that intend to scale quickly and plan to hold onto the business for many years without withdrawing dividends. Here is how it works. The owners structure the company as a C corporation.

Because the profits are funding rapid growth, there is never a need to withdraw dividends and be subject to the second layer of tax. The lower tax burden frees up more cash for growth in the early years. It is true that certain C corporation owners can exit their ownership position tax-free, which would be a major counter to the last point.

The details to make this happen are well beyond the scope of this article, but worth noting. In short, the idea of using the C corporation structure for tax efficiency has merit in certain unique situations. For most small to mid-businesses, though, the cons will generally outweigh the pros. That law limits the ability of individuals to deduct state income taxes on their personal tax returns. That is a problem for pass-through business owners who are paying large amounts of state income tax on their personal returns remember pass-throughs do not pay their own income taxes.

A C Corporation pays its own state taxes and is not subject to this limitation, so especially in high tax states, that structure becomes more attractive. States are still reacting to the new law e. That is because the LLC limited liability company is a zebra in this list of horses. The owners if an LLC must choose one of the other four structures as their identity for tax purposes.

It is completely fine to organize directly as one of the four tax entities without being an LLC. Why then would anyone choose the LLC umbrella?

Stated a different way, why does it seem like almost all new companies nowadays are formed as LLCs? Except in rare situations, the LLC umbrella has no effect on taxation. Any LLC must still decide whether it wants to be a C corporation, S corporation, partnership or proprietorship for tax purposes.

As we discussed at the beginning of the article, the choice of entity fundamentally boils down to a few key considerations:. From a tax standpoint, the S corporation offers a single layer of tax unlike C corporations and earnings are not subject to FICA tax unlike partnerships and proprietorships.

Accordingly, most often the best choice for Point 1 is the S corporation. Sole proprietorships win 1st place for Point 2. They are by far the least complex and have the lowest cost of setup and ongoing governance and administration. For multi-owner companies, a partnership or LLC wins out for simplicity. Finally, from a liability standpoint, the LLC structure is hard to beat.

It offers liability protection along with the choice of any of the four tax entity structures. A straight S corp or C corp are considered solid from a liability perspective as well.

Going back to the fictitious companies introduced at the beginning, which entity type should they choose? As a classic technology startup hoping to receive VC or PE funding, they have little option but to be a C corporation.

The only other possible consideration would be to form first as an LLC taxed as a partnership or S corporation then cut over to C status when the corporate investors become a reality. If you are forming a partnership, we highly recommend creating a partnership agreement. This agreement ensures both you and your partner understand what would happen to the business if a difficult situation arises such as an inability to perform or significant time away from the business.

Most owners starting a small business will choose to be an LLC. If a biz owner believes an electing as an S-corp tax status will save money on taxes, they will make that designation. If a business is earning a lot of profit and the owner would like to keep a portion of profit in the business, or they want to raise funds from an investor, they may want to consider a C-corp. Blake Stockton is a staff writer at Fit Small Business focusing on how to start brick-and-mortar and online businesses. Prior to joining Fit Small Business, Blake consulted with over small biz owners and assisted with starting and growing their businesses.

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Learn More. Question 1. Question 1 of 4. How possible is it that a customer, employee, or vendor could sue your business for wrongdoing? Question 2 of 4. Not likely. After paying monthly expenses and yourself a reasonable salary, will your business likely have profit remaining?

Question 3 of 4. 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? Question 4 of 4. Pay myself. Keep profits in the business. Step-by-step blueprint that shows you how to go from idea to launch in 30 days. This email address is invalid. You should also determine how many investors, stock classes and foreign owners will be members of your LLC in order to follow the proper guidelines under your state laws.

Joshua Stowers contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.

What certificates are required for an LLC and an S-corp? Can an LLC purchase membership interests in an S-corp? Simone Johnson. Choosing the right business type is important to the success of your business. Find out whether your company should be an LLC or S corporation. An S corporation isn't a business entity like an LLC; it's an elected tax status. LLC owners must pay self-employment taxes for all income.

S-corp owners may pay less on this tax, provided they pay themselves a "reasonable salary. This article is for entrepreneurs who are trying to decide whether they should structure their business as an LLC or S corporation.

What is an LLC? What is an S-corp? What is the difference between an LLC and S-corp? Tax differences An S-corp is not a business entity like an LLC, sole proprietorship, partnership or corporation.

Shareholder structure, subsidiary restrictions and stock S-corps can't have more than shareholders total, while an LLC can have an unlimited number of members. Is an LLC or S-corp better for entrepreneurs? Pros The business pays your salary and the payroll taxes on it.

This may save you money on taxes because, as with a regular LLC, you would pay self-employment taxes on the business's gross income. Additional earnings are distributed to shareholders as dividends. This may also save you money, since dividends are taxed at a lower rate than income.

Cons There's a salary cap. You must establish reasonable compensation for owner-employees. You're limited to one class of stock and shareholders. Business News Daily Staff. Simone Johnson is a business.

Simone has researched and analyzed many products designed to help small businesses properly manage their finances, including accounting software and small business loans. In addition to her financial writing for business. Start Your Business. Updated Paying taxes is never fun, but there are steps you can take to Small Business Taxes: What to Expect in