Comparison of LLC, S Corp and C Corp

by Christopher Carter; Updated September 26, 2017

A limited liability company (LLC) differs from an S corporation and a C corporation in terms of management and tax flexibility. S corporations have favorable taxation like an LLC, but the company has ownership and size restrictions not present in a C corporation or an LLC. C corporations have advantages over S corporations and LLCs in terms of raising capital, since a C corporation can issue multiple stock classes to investors. LLCs cannot issue stock, and S corporations cannot issue more than one class of stock.

Formation

LLCs, S corporations and C Corporations form by filing formation documents with the secretary or department of state. Unlike a C corporation and an LLC, S corporations must file Form 2553 with the Internal Revenue Service to create the entity. Form 2553 needs to get filed with the IRS within 75 days of filing the S corporation's articles of incorporation with the secretary or department of state. The form requests information such as the nature of the S corporation's business activities and the company's date of incorporation. Every shareholder must sign Form 2553.

Taxes

An LLC can get taxed like a corporation, sole proprietorship or a partnership. When the company elects taxation as a partnership or a sole proprietorship, the LLC has a single layer of taxation that allows the company's members to report their portion of company profits and losses directly on their personal income tax return. S corporations get the same tax treatment, as shareholders of an S corporation report income and losses from the business directly on their individual or joint income tax return. S corporations and LLCs do not pay taxes on the company's income as a business entity, unless an LLC elects to get taxed like a regular C corporation. Unlike LLCs and S corporations, C corporations are subject to double taxation. The initial tax happens when the company pays taxes on its net income, at the appropriate corporate tax rate. The second layer of taxation occurs when dividends get issued to the company's shareholders. C corporation shareholders pay taxes on dividends received from the company at their personal income tax rate.

Structure

S corporations and C corporations have a specific management structure consisting of directors, shareholders and officers. Shareholders of the business recruit individuals to serve on the company's board of directors. At least one individual has to serve as the company's director, unless the corporation forms in a state like Arizona where at least three individuals must get appointed to serve on the company's board of directors. The directors select individuals to hold officer positions in the company, such as a treasurer and president. The officers of a corporation must oversee the company's day-to-day activities. LLCs have more flexibility in terms of choosing the company's management structure. The members of the business may handle the company's managerial duties, or appoint nonmembers to manage the LLC's affairs.

Considerations

LLCs do not have to adhere to the formalities of an S or C corporation. S and C corporations must have at least one meeting on an annual basis, and minutes of each company meeting must get recorded and maintained with the corporation's other important business documents. LLCs have no obligation to hold an annual meeting or keep a record of company minutes. Corporations must create financial statements for investors and other interested parties to indicate the company's financial position. LLCs have no requirement to create financial statements. LLCs have greater flexibility than S corporations and C corporations in terms of allocating profits and losses. Members of an LLC may allocate profits and losses in any manner, without regard to a member's ownership interest. S corporations and C corporations must divide company profits according to the percentage of shares owned by a shareholder.

About the Author

Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.