LLC, C-Corp, S-Corp, Non-Profit: What does it all mean and which one is right for me?
Navigating the maze of forming a new business can be quite a daunting exercise if you are not armed with the requisite knowledge, or if you do not have the right partner to guide you through the process. One of the most critical decisions that you will need to make will be the type of legal structure for your new business entity. When you start that process, you will start hearing about Limited Liability Corporations (LLCs), C Corporations, S Corporations, and Non-Profits. The type of legal business structure you will ultimately choose will be guided by a variety of factors. You will then need to apply some type of relative weighing to all those factors. What you will find is that you will end up excluding some business structures automatically based on certain objectives that you need to achieve.
So what are the major factors that will guide your decision in the selection of the legal structure type? The major considerations will be:
Overview of the Different Business Structure Types
The Limited Liability Company (LLC)
The Limited Liability Company (LLC) structure is one of the most popular types of business entities because of how relatively simple and flexible they are to set up and operate. As a result, many smaller organizations gravitate to this structure. While the policies around forming and operating an LLC varies from state to state, certain critical factors remain constant. The LLC provides its LLC owners with limited liability protection, and it typically does not pay taxes for itself. What typically ends up happening is that the net income or loss that the business generates is “passed through” to the personal income of the owner(s)/member(s), and is simply taxed as personal income.
The Sub-Chapter or Small Business Corporation (S-Corp)
The S-Corp has a very rich history as it derives its name from a tax code that was created and enacted into law by the Congress of the US in 1958. S-Corporations can only be owned by US citizens and it was created specifically to encourage small and family business creation. One of the critical benefits of the S-Corp is that it eliminates the double taxation that regular corporations are subjected to. With this structure, the liability of the owners and investors is limited to only the amount of their investment. This type of entity is not required to pay taxes on a corporate level. So how is it treated? The income generated by an S-Corporation will flow through to the personal income tax returns of the shareholders.
A Corporation (or C-Corp) is formed at the state level by filing Articles of Incorporation with the Secretary of State within the state of incorporation. There are also specific ongoing regulations and filing requirements that corporations are required to satisfy. Over the years, the C-Corp structure has been a very successful and useful innovation that has allowed a group of individuals to collectively pool their resources and capital to pursue a common purpose, with their risk limited solely to the amount of stock owned. It is important to note that unlike the LLC and the S-Corp whose owners can benefit from pass-through taxation, the C-Corp structure is required to file corporate tax returns.
The Non-Profit Corporation
A Non-Profit Corporation is an organization that uses its surplus revenues to further achieve its purpose or mission, rather than distributing its surplus income to the organization’s shareholders (or equivalents) as profit or dividends. The main purpose of such a corporation is to pursue goals that are beneficial to the public. While Nonprofit corporations are allowed to generate profits, its profits must be used to preserve the existence and expansion of the corporation. If a Non-profit corporation is classified correctly, they are exempt from federal, sales, and property taxes – and may also be exempt from paying employee taxes as well. It is important to note that Non-Profits can be taxed if they make money from activities not related to their main purpose. In order to be recognized as a nonprofit by the IRS, the Non-profit corporation must file and obtain the appropriate 501(c)3 classification in order to receive the desired tax treatment.
So how does each business structure match up to each other graphically? We have created the following comparison table so you can visually appreciate the major similarities and differences of each business structure.
As you can see from the examination of this issue, the business formation type chosen for your new business can (and will most likely have) major implications on issues such as ongoing requirements, taxation, and to the extent that one can personally benefit from the enterprise. We will also be deploying an interactive Business Formation Wizard soon that will ask you a few questions and give you a recommendation on what business structure may be right for you. This is just another step that we are willing to take to ensure that launching your new business will be as seamless and easy as it can possibly be.