Company Formation: Understanding C Corps, S Corps and LLCs

Each of these three types of corporate entities - C corporations, S corporations and LLCs - have distinct advantages and disadvantages. When deciding whether or not to form a corporation, it's critical to wisely choose *which* corporation to form.

Here, we will help you understand the differences between C corporations, S corporations, and limited liability corporations so that you can make an informed choice about which corporate structure will best meet your needs.

C corporation vs. S corporation vs. LLC.

C Corp

S Corp

LLC

Formation Requirements, CostsMust file with state, state specific filing fee requiredMust file with state, state specific filing fee required.Must file with state, state specific filing fee required.
LiabilityShareholders granted personal protection from debts and business liabilitiesShareholders granted personal protection from debts and business liabilitiesThe LLC exists as a separate entity from its partners, but members may be held liable for non fiscal obligations
Administrative Requirements
  • Shareholders must elect a board of directors
  • The board of directors must hold an annual shareholders’ meetings
  • Annual report filing requirements.
  • Shareholders must elect a board of directors
  • The board of directors must hold an annual shareholders’ meetings
  • Annual report filing requirements
Relatively few requirements.
ManagementShareholders need to elect directors, who manage the business.Shareholders need to elect directors, who manage the business.Members can set up their own management structures
TermPerpetual: the corporation can extend past the death or withdrawal of its shareholders.Perpetual: the corporation can extend past the death or withdrawal of its shareholders.Perpetual, unless the state it is registered in requires a fixed amount of time.
TaxationDouble taxation: company income is taxed at the corporate tax rate, and shareholders pay personal taxes on any dividends or profits distributed to them.Profits and losses pass through the corporation and are reported on shareholders’ individual tax returnsProfits and losses pass through the LLC and are reported on shareholders’ individual tax returns
Self-Employment Tax BreakThe employer portion of the self-employment tax is considered as the business expense. The IRS gives a 50% tax break on the self-employment tax. C-Corp members can deduct accordingly.Profits of the S-Corp which pass through to the shareholders are not subject to self-employment taxLLC members must pay self-employment tax on all income from the LLC.
FormalitiesMust file a C Corporation income tax return (IRS Form 1120) every year.

Must file an annual report with the Secretary of State in the state the C corp is registered in, usually along with a reporting fee that varies by state.

A statement of information is required within 90 days of formation.

Must maintain corporate formalities such as drafting bylaws, keeping minutes, holding annual meetings, issuing stock, keeping a paper a trail of financial dealings between the corporation and its shareholders, and avoiding the "piercing of the corporate veil,” which usually happens when an officer of the corporation spends corporate money on personal expenses.
Must file a S Corporation income tax return (IRS Form 1120-S) every year.

Must file an annual report with the Secretary of State in the state the S corp is registered in, usually along with a reporting fee that varies by state.

A statement of information is required within 90 days of formation.

Must maintain corporate formalities such as drafting bylaws, keeping minutes, holding annual meetings, issuing stock, keeping a paper a trail of financial dealings between the corporation and its shareholders, and avoiding the "piercing of the corporate veil,” which usually happens when an officer of the corporation spends corporate money on personal expenses.
Few formalities are required. An operating agreement is recommended, but annual meetings are not required.

Most states require a statement of information to be filed within 90 days of formation, along with a filing fee, and then periodically thereafter.
Continuity of LifeIndefinite termIndefinite termIndefinite term

Last Updated on: Fri, 18 Jun 2021