Company formation - Should you choose S Corp, C Corp, or an LLC?
Company formation is the legal process of incorporating a business to separate its assets and its owners. You will find three types of corporate entities:
- C corporations
- S corporations
- LLCs (Limited liability company)
All the above corporate entities have certain advantages and disadvantages. So, it’s pretty challenging to select which corporation to form.
Here, we will help you understand the differences between C corporations, S corporations, and LLCs. Then, you can make an informed decision about which corporate structure will be best for your business formation.
|Eligibility requirements||A company has to file “Articles of Incorporation” with the Secretary of State in the state of incorporation. Besides, there have to be company bylaws, the appointment of directors, issuance of stocks.||An S corporation should have:||A corporation has to be one of the partners to form an LLC. The formation process requires an ‘Operating Agreement’ in all states.|
|Liability||Shareholders are granted personal protection from debts and business liabilities.||Shareholders are not liable for the company’s debts or liabilities. And in most cases, creditors can’t go after the shareholders’ personal assets in order to recover business debts.||The LLC exists as a separate entity from its partners. Still, a member can be liable in some situations, like if they personally guarantee a loan or a business debt and fail to pay it off or to deposit taxes withheld from employees' wages.|
|Management||Shareholders elect directors who manage the business. And the board of directors needs to hold annual shareholders’ meetings.||Shareholders elect directors who manage the business. And the board of directors needs to hold annual shareholders’ meetings.||Members can set up their own management structures.|
|Term||Perpetual: 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.|
|Taxation||Double taxation as the 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 returns.||Profits and losses pass through the LLC and shareholders’ pay tax on their share of profits.|
|Self-Employment Tax Break||The 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 tax.||LLC members have to pay self-employment tax on all income from the LLC.|
|Tax return||Must file a C Corporation income tax return (IRS Form 1120) every year.||Must file an S Corporation income tax return (IRS Form 1120-S) every year.||Single-member LLC owners should report all profits or losses of the LLC on Schedule C and submit it with a 1040 tax return.|
Co-owned LLC has to file Form 1065 with the IRS to make sure that LLC members are reporting their income correctly.
|Initial report||Need to file within 90 days of forming a company, with the Secretary of State in the state the C corp is registered in. A reporting fee is also required depending on the state.||Need to file within 90 days of forming a company with the Secretary of State in the state the S corp is registered in, usually along with a reporting fee that depends on state.||Need to file within 90 days of registering an LLC with the Secretary of State in the state the LLC is registered in, along with a reporting fee.|
|Annual report||Required every year.||Required every year.||Also known as the statement of information, most states require the report every year. But some states like New York may require it biennially. Required fees can vary by state.|
|Corporate formalities||Should 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.||Should 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.||Requires a few formalities. An operating agreement is recommended, but annual meetings are not necessary.|
|Continuity of Life||Indefinite term||Indefinite term||Indefinite term|
Can you register your company on your own?
Well, if your business is a corporation, LLC, or partnership, you will need a registered agent in your state before filing. The agent should be located in the state where you are registering your business.
What is the cost of starting a business in the United States?
If you are forming a corporation or an LLC, you have to register with your state. The filing fee depends on the state your business is registered. Electronically filed trademark registration carries a charge of about $250 to $350 for each class of goods or services.
Can you get a business loan if you are carrying debt?
When you are starting a business, lenders usually check your personal credit score. They might require a minimum credit score of 680 or more.
So, if your credit score is low, you may not qualify for a business loan. Even if you have an adequate credit score, it’s better to pay off debt before taking out a new loan.
How can you repay personal debts before starting a business?
My team and I can help you become debt-free so that you can focus on your new business. You can contact us and we will be happy to help you.