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The incorporation process allows business owners to create a layer of separation between themselves and their company. After making the decision to incorporate your business, the next step will be to select your corporate structure. While there are many structures to consider, three of the most common are the limited liability company (LLC), C corporation, and S corporation.
Limited Liability Company (LLC)
As with all corporate structures, forming as an LLC will provide you with liability protection. In addition, the LLC offers the most flexible management options and requires the fewest number of ongoing compliance formalities. Compared to C corps and S corps they require less paperwork, less documentation of meetings and daily operations, and less administrative effort.
Another benefit is that LLCs are not taxed at the corporate level; instead, all profit and losses are reported with the personal income taxes of each member. This is called "pass through" taxation. This type of taxation often proves favorable especially for smaller organizations.
There is a trade off for choosing to take advantage of the flexibility that LLCs offer. An LLC cannot sell any type of stock and typically is not attractive to venture capitalists. Also, if the LLC is found to be operating in violation of its corporate formality requirements, the owners (Members) may be held personally liable for the debts of the company.
Most of the world's largest companies are C corporations. This is largely due to the fact that only C corporations may sell publicly traded stock. This ability to sell equity makes C corps the primary investment choice for venture capitalists and other financing organizations.
Because they can be publicly traded, C corps are highly regulated. There are many ongoing corporate formalities that must be satisfied on a regular basis including, the creation of bylaws, annual meetings, director meetings, and issuance of shares. The ongoing fulfillment of these regulations can be a drain on company resources and staff making it difficult for smaller organization to operate under this structure. In addition to the ongoing compliance issues, corporations are subject to double taxation because the income of the company is taxed at the corporate level and then again at the shareholder level.
S corporations have many of the formalities of a C corp and the flexibility provided by an LLC. Like an LLC, S corps are able to take advantage of "pass through" taxation. They also have the added benefit of allowing owners (shareholders) to be employees, which results in savings on self-employment, social security, and Medicare taxes.
However, S corps do have limitations. While they may sell stock, S corps are limited to only 100 shareholders. Also, all shareholders must be U.S. citizens or residents, which creates a serious barrier for international organizations. In addition, S corp shareholders may not be trusts or subsidiary companies.
For more benefits and limitations of these three business structures please refer to ourBusiness Comparison Chart.