USA Incorporation: Differences between LLC, C-Corp and S-Corp

Last Updated at: Feb 08, 2021
US Incorporation
US Incorporation: Difference between LLS, S-Corp, C-corp
On 27th March, President Trump signed the CARES (Coronavirus Aid, Relief and Economic Security) Act to provide relief to LLCs, C-Corps, and S-Corps, among others. It has expanded the existing SBA 7(a) Loan Program to support sustained business operations.

Business goals are never one-size fits all, making a choice of business entity is one of the most important decisions, with far-reaching consequences. There are several forms of business structures, LLC and Corporation being one of them. These different forms of business entities have differences in structure, protection, asset base, ownership and taxation. Thus, for any entrepreneur planning to set base in the United States, it is imperative to know the differences and advantages of several alternatives of business forms before zeroing down on the type of structure.

Each business is unique and will have varying goals. So, there is no one-size-fits-all solution for all businesses. There are many forms of business structures with LLC, Corporation, etc. Each of these business forms have varying structures, asset base, protection, taxation and ownership. For any entrepreneur in the USA, it is important to know the advantages and differences before deciding the structure for the business.

Similarities between LLC and Corporations

There exist several similarities between a Limited Liability Company and a Corporation (Inc.). There is the protection of owner’s assets from exposure to personal liability, therefore, for any debts taken in the name of the company, the promoter, entrepreneur or shareholder can ring-fence their personal assets from liability. Both of these entities are considered separate from the identity of their owners, meaning that tax liability, licenses, filings can be done in the name of the business entity. Both LLC and Inc. type of business can be registered in all fifty states and the District of Columbia in the United States.

Types of Incorporation in the United States & Differences

Tax Differences

The US laws allow for several types of corporate business structures such as the C type or the S type corporations, in addition to partnerships. In an S type corporation, the entity is not taxed but, rather the individual owner’s income is taxable and hence profits can be passed on to shareholders who pay tax thereon. Thus, losses and profits become taxable in the hands of the S-Corp shareholders.

 In a C type corporation, the taxes are kept separate as the identity of shareholders is divorced from the company. This becomes a major advantage for C-type corporations as the advantages of corporate tax structure become available. This means profits subject to tax are reduced by the number of expenses such as wages, overheads. Only the net profits passed on as dividends are taxable in the hands of shareholders, therefore some double-taxation may happen.

For outsiders, it is considered that the flexibility available to an LLC to choose to be taxed as a corporation offers greater tax advantages as they can select the most efficient tax plan. The Internal Revenue Service states that an LLC may be taxed as a partnership or a corporation (for a multiple-member LLC), or be disregarded as an entity separate from its owner (for a single-member LLC) and can choose to be taxed as a different business form for tax purposes.

Incorporate Your Business in USA

Ownership & Filings

C Corporations also do not have restrictions on ownership; however, an S Corporation is restricted to 100 shareholders. Moreover, shareholders have to be only US residents or resident aliens to be able to constitute an S-Corp. The C-corp is the default type of corporation. When the articles of incorporation are filed with the secretary of state, the company will become a standard C-corp. To structure a company as an S-corp, one must file IRS Form 2553. After filing the form, the business entity becomes an S-corp for federal tax purposes. An LLC is not an incorporated entity, so it is formed by filing an Articles [or Certificate] of Formation, signed by an Organizer, and an Operating Agreement ( like that between partners in a partnership form) being filed by the members of the LLC.

Business Dynamics

Since there are no restrictions on C-Corp ownership, the stock can be of any class, it is highly preferred by angel investors and venture capitalists. Therefore, if the business aims to raise money from these sources, C-Corp should be preferred.

The corporate income tax rate for C-corps has been cut from 35% to 21% in the US. Owners of S-corporations and other pass-through entities (which means profits and losses are passed on to owners and shareholders) including  LLCs, sole proprietorships, and partnerships will be able to deduct 20% of business income on their personal tax returns. This deduction expires in 2025 unless Congress extends the law. Thus, an entrepreneur should ideally consider the shape they’d want their business to take, the sales and revenue figures to minimize tax liability and then assess alternate types of business forms such as LLC, C-Corp or S-Corp.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.