Comparing different types of company structures: LLC, C corp, S corp

What is a business entity?

A business entity is the legal structure that determines how your business is recognized by law.

The business structure you choose affects how you file taxes, manage finances, and distribute profits. Common business entities include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each of these structures has its own advantages and trade-offs.

Business entities fall into two broad categories. Legal business entities, like LLCs and corporations (C corps and S corps), are legally separate from their owners and require a state filing to form. Unincorporated entities, like sole proprietorships and general partnerships, have no legal separation between the business and its owners.

DBA vs. LLC and corporation

Unlike LLCs, C corps, and S corps, a DBA is not a business structure. Rather, a DBA allows a company to operate under a different name. A DBA stands for “doing business as” and is also commonly referred to as an assumed or fictitious business name. DBAs are typically filed at the county level, though some states have state-level filing requirements.

When an LLC or corporation is formed, its legal business name is the one registered with the state. However, a business may choose to operate under a different, more recognizable name by filing a DBA. For example, an LLC registered as XYZ Supplies LLC could file a DBA to operate under a more descriptive name — like Village Party Supply Store — that better reflects what the business does.

Advantages and limitations of DBAs

• Compliance: Most states require a business to register a DBA when operating under a name other than its legal name. This protects consumers by making it possible to identify who is actually behind the business.
• Branding flexibility: A DBA allows a business to operate under a different name. In fact, a business can run multiple "brands" under one umbrella. (e.g., one LLC can have three DBAs for three different product lines.)
• Not a business structure: A DBA filing does not create a business entity, and it does not provide the liability protection and tax advantages of incorporating or forming an LLC.
• Limited name protection: Registering a DBA in one county often doesn't stop someone in the next county from using the same name.

For more information, read What is a DBA? 

C Corp, S corp, and LLC business types

To form your business as a corporation or LLC, you must file formation documents with the Secretary of State’s office (or other department responsible for business entity filings). Articles of Incorporation are used for corporations, and Articles of Organization for LLCs.

LLCs, C corps, and S corps all provide limited liability protection, which helps protect owners' personal assets from business debts and creditor claims. Sole proprietorships and general partnerships offer no personal liability protection, meaning the business owners are personally responsible for all business debts and obligations.

C corporation

A corporation is a legal entity created under state law that is separate from its owners, called “shareholders”. When you incorporate, your business is set up as a standard (or “C”) corporation. This is the default corporate structure.

As a C corp, the business is its own taxpaying entity, separate from its owners. The business files its own tax return and pays taxes on its income. If the profits of the business are then distributed to the shareholders as dividends, the shareholders must then pay personal income tax on that distribution. This is known as “double taxation”. Because of this, many small businesses choose to structure as an LLC or S corp instead. However, startups seeking outside investment often prefer the C corp structure. Venture capitalists typically require it because C corps can issue multiple classes of stock, making it easier to structure investment deals. C corps may also offer Qualified Small Business Stock (QSBS) tax benefits, which can provide significant tax savings when certain conditions are met.

A C corporation might be the right business type for you if you want or need

• Limited liability protection
• Venture capital for financing
• Multiple share classes to structure ownership
• The ability to retain earnings in the business for growth
• The ability to offer substantial employee benefits, including health, life insurance, education assistance, and transportation
• The ability to offer stock options to employees

Learn more about forming a C corporation

S corporation

An S corp is a standard corporation (or C corp) that has elected “S corporation” tax status with the IRS. Once you’ve formed a corporation with the state, you can make this election 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 itself does not pay income tax, avoiding double taxation of the C corp. Additionally, distributions paid to S corp shareholders are not subject to self-employment tax.

However, S corps come with restrictions. They can only have one class of stock, are limited in the number of shareholders they can have and must meet other IRS eligibility requirements.

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

• Limited liability protection
• Pass-through taxation to avoid double taxation
• Self-employment tax savings on shareholder distributions

Learn more about forming an S corporation

Limited liability company (LLC)

An LLC is a business entity formed under state law that provides personal liability protection for its owners, called members. Like an S corp, an LLC offers pass-through taxation where business income and expenses are reported on the members' personal tax returns rather than at the entity level.

If you are the only owner of an LLC, the IRS treats the LLC as a disregarded entity. The IRS ignores the entity for federal income tax purposes, and 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 if you want:

• Limited liability protection
• The ability to pass early losses through to yourself and the other members during the startup phase
• Flexibility in accounting methods. (Unlike C corps, LLCs are not required to use the accrual method of accounting.)
• A structure suited for owning real estate
• Management flexibility. (LLCs offer more flexibility than corporations in terms of how the management of the business is structured.)
• Fewer 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

• Liability protection: C corporations, S corporations, and LLCs all provide limited liability protection, shielding the personal assets of their owners from business debts and obligations.
• Best for small businesses: LLCs and S corporations are commonly used for small business activities. Both business types enable you to grow your business and bring on new owners.
• Taxation: LLCs and S corps offer pass-through income; business income is reported on the owners' personal tax returns rather than at the entity level. C corps are taxed separately from their owners, which can result in double taxation if profits are distributed as dividends. C corps, S corps, and LLCs all offer varying tax advantages such as tax deductions that are not available to sole proprietors.
• Self-employment and payroll taxes: S corp shareholders who work in the business are treated as employees and pay FICA taxes (Social Security and Medicare) on their compensation but not on distributions. LLC members are considered self-employed and owe self-employment tax on their share of the business's net income.
• Credibility: C corps, S corps, and LLCs can all lend credibility to a business, signaling legitimacy to customers, vendors, partners, and employees.
• Raising capital: Capital can be raised more easily with a C corp and to a lesser degree with an S corp.

Other considerations: State selection

Most people incorporate or form an LLC in the state where they operate, but you are not required to do so. You can form your business in any of the 50 states or the District of Columbia (DC). It may be worth weighing the potential advantages or disadvantages of this option. Some business owners choose states like Delaware or Wyoming for their business-friendly legal system or for tax advantages.

Keep in mind that if you form a business in a state other than where you operate, you will likely need to foreign qualify in your home state. (Foreign qualification is the process of registering a business in a state that is not its original formation state.) You will need to pay registration fees, ongoing fees, and taxes in both the state of formation and state where you operate.

For more information, see Incorporating in Delaware, Nevada, and Wyoming.

Choosing a business entity type

Choosing the right business structure is one of the most important decisions you'll make when starting or restructuring a business. The right choice depends on several factors, including how you want to be taxed, how much personal liability protection you need, and whether you plan to bring on investors or outside financing.

While sole proprietorships and general partnerships are the simplest structures to create, they offer no personal liability protection, meaning owners are personally responsible for all business debts and obligations. LLCs, S corps, and C corps all provide personal liability protection, making them the better path for most businesses.

• LLCs are a popular choice for small businesses seeking pass-through taxation and fewer ongoing formalities.
• S corps work well for small businesses that want pass-through taxation with the added benefit of reducing self-employment taxes.
• C corps appeal to businesses planning to raise capital or scale significantly.

The best structure for your business will depend on your specific goals, the nature of your business, and the state where you operate. Consulting with a legal or tax professional can help ensure you make the right choice.

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

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