What entity type to choose?
The incorporation process allows business owners to create a layer of separation between themselves and their company. If things don’t work out or you find yourself in a lawsuit, if you are properly incorporated, you can generally preserve your personal assets like your house, car or retirement. The company may go under, but you don’t have to. After making the decision to incorporate your business, the next step will be to select your corporate structure. There are many structures to consider. Bedrijf-Amerika can help you launch your business as a limited liability company C corporation or S corporation. Continue reading to figure out which corporate structure is right for you, the Limited Liability Company, the C Corporation or the S Corporation.
Feature | LLC (Limited Liability Company) | C-Corporation | S-Corporation |
|---|---|---|---|
Liability Protection | Limited to capital invested | Limited to capital invested | Limited to capital invested |
Taxation | Pass-through taxation | Double taxation (corporate + shareholders) | Pass-through taxation |
Formal Requirements | Relatively simple | Complex (annual meetings, minutes) | Complex (ownership restrictions) |
Ownership | Flexible | Unlimited shareholders | Max. 100 U.S. shareholders |
Profit & Loss Allocation | Flexible | Based on shareholding | Based on shareholding |
Best Suited For | Small to medium-sized businesses | Large companies | Small U.S.-based businesses |
Limited Liability Company
Forming a Limited Liability Company is the easiest and most flexible way to start your business. LLCs provide personal asset protection which shields you from being personally liable for business debts. LLCs also allow you to spend less time doing paperwork and more time operating your business.
Protection from Personal Debts and Liabilities
An LLC separates personal and business assets, protecting owners from personal liability for business debts and legal claims. This means creditors can only go after business assets, not personal belongings like homes or savings, offering strong financial security for entrepreneurs.
Flexible Taxation
LLCs offer flexible tax options. They’re defaulted as pass-through entities, avoiding double taxation, but can also elect S-corp or C-corp taxation to optimize tax benefits. This flexibility helps business owners minimize tax burdens and maximize profits.
Privacy Protection
In many states, LLC owners can remain anonymous by listing only the business name and a registered agent on public records. This provides added privacy and protects personal information from being easily accessible.
Minimal Formalities
LLCs are easier to manage than corporations, with no requirements for annual meetings, a board of directors, or extensive record-keeping. This reduces administrative burdens, allowing owners to focus on running their business instead of complex paperwork.
Flexible management structure
LLCs offer a flexible management structure with no limit on the number of members, who can be individuals, corporations, or even other LLCs. Owners can choose between member-managed or manager-managed operations, allowing for customized business management.
Disadvantages
While LLCs offer flexibility, they have some downsides. Owners face higher self-employment taxes. LLCs also lack stock options, making investor funding harder, and state laws vary, complicating multi-state operations. Despite this, LLCs remain a popular choice for their ease and liability protection.​
Frequently asked questions
INC - C.Corp
A C Corp is the only type of organization that can "go public" and sell an unlimited number of ownership shares. They do typically get taxed at a higher rate due to taxes being imposed at both a personal and corporate level, however having access to more capital, higher revenue potential, and ultimately profits, often offsets this.
Protection from Personal Debts and Liabilities
For business that choose an C Corp business structure, personal assets are considered separate from the personal interest invested in the company. This means that debts and liabilities incurred are the responsibility of the business rather than its members.
Ease of Ownership Changes
Ownership changes in a C Corp occur through the sale of stock to new or existing shareholders, and a C Corp can have an unlimited number of owners.
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Unlike LLCs, nonprofits, or sole proprietors, C Corps may sell stock. A C Corporation can issue many types of stocks, which may be sold to an unlimited number of shareholders. Any equity to third parties’ sales must comply with SEC regulations.
Business Perpetual Existence
While an LLC’s life depends on the terms of the Operating Agreement, S and C Corps are separate entities that survive the death or transfer of stock of the owners or major shareholders.
Disadvantages
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Subject to double taxation on corporate profits - 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
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Ongoing, required formalities may be burden to company resources and staff.​
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When establishing a corporation, you'll need to designate key roles such as president, secretary, and treasurer. These roles can be held by the same individual, and you have the option to appoint all officers as directors.​
Frequently asked questions
INC - S Corp
S Corporations are entities that elect to be treated as S Corporation under the IRS regulations. Thus, you may technically be registered as an LLC or Corporation in your state, but you will make a Subchapter S election with the Internal Revenue Service giving you a different tax treatment. S Corporations can have many of the formalities of a C Corp, yet offer the flexibility provided by a LLC. Similar to a 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 and must follow regulations regarding their shareholders. For instance, S Corp shareholders may not be business trusts or subsidiary companies. Additionally, all shareholders must be U.S. citizens or residents, which creates a serious barrier for international organizations.
Protection from Personal Debts and Liabilities
For business that choose an S Corp business structure, personal assets are considered separate from the personal interest invested in the company. This means that debts and liabilities incurred are the responsibility of the business rather than its members.
Option to Sell Shares
While LLCs are not allowed to sell stock, an S Corp may issue one type of stock, which may be sold to a maximum of 100 shareholders. Any equity to third parties’ sales must comply with SEC regulations.
Pass-Through Taxation
Unlike C Corporations, S Corporations are not taxed at the corporate level. Instead, all profits and losses are reported with the personal income taxes of each shareholder (owner).
Business Perpetual Existence
While an LLC’s life depends on the terms of the Operating Agreement, S and C Corps are separate entities that survive the death or transfer of stock of the owners or major shareholders.
Disadvantages
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Limited to 100 shareholders who are U.S. citizens and cannot be business trusts or subsidiary companies.
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Offer only one class of stock.
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Requires state-specific filing and fees.
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Must abide by ongoing corporate formalities such as holding annual shareholder meetings