Comparing Tax Implications of LLC vs S-Corp vs C-Corp Businesses

Starting a business is an exciting journey, but choosing the right business structure can be overwhelming. The type of business entity you choose impacts everything from taxes to liability to your day-to-day operations. 

In this article, we’ll break down the key differences between LLCs, S-Corps, and C-Corps so you can best decide which path to take for your new venture.

Articles of Incorporation: How to Register a Business with the State

Before diving into the specifics of each business structure, it’s important to first understand the basic paperwork involved in registering your business. 

To legally form your business, you need to file Articles of Incorporation with your Secretary of State office. It includes important details like your business name, address, and the names of your initial board of directors. Once this document is filed, your business will be officially recognized as a legal entity.

Download an Articles of Incorporation Sample

To help you get started, you can see a sample Articles of Incorporation from SEC.gov here.

What Business Structure is Best for Small Businesses?

Choosing the right business structure depends on your specific needs and goals. Here’s a quick overview of the most common types:

• Sole Proprietorship — The simplest form, where a business is owned and operated by one person. It’s easy to set up, but the owner is solely responsible for business debts.
• Partnership — Involves two or more people who share ownership of a business. Partnerships are relatively easy to establish but come with shared responsibility— making decisions, paying expenses, raising funding, etc.
• Limited Liability Company (LLC) — Offers a business liability protection without the complexity of a corporation. It’s flexible and has fewer laws and regulations.
• S Corporation (S Corp) — Provides tax advantages by allowing profits and losses to pass directly to shareholders' tax returns—taxed only once, no corporate tax—but these have more regulations than an LLC and limitations on ownership (100 shareholders max).
• C Corporation (C Corp) — No restrictions on the number of shareholders, which can make it easier to raise capital, but are subject to double taxation—once on corporate profits and again on dividends paid to shareholders.

What are the benefits of a Limited Liability Company (LLC)?

“Limited liability” means business owners are not personally responsible for the company’s debts or legal troubles. In other words, if the business owes money or gets sued, the owners' personal assets—their house or car—are protected. Only the money invested in the business is at risk.

Common entities that offer liability protection include:

• Limited Liability Company (LLC)
• S Corporation (S Corp)
• C Corporation (C Corp)
• Limited Partnership (LP)
• Limited Liability Partnership (LLP)
• Professional Corporation (PC)
• Nonprofit Corporation

Here are some key benefits of going with an LLC for your business:

1. Your personal assets are protected from business debts and lawsuits.
2. You can choose how you want to be taxed, which can help you save money. (For example, profits can be taxed on your personal tax return instead of the business itself.)
3. LLCs have fewer rules and formalities, making them easier to run and manage.

How Do You Start a Limited Liability Company (LLC)?

• Choose a Unique Name — Do a trademark check to make sure the name you want isn’t already being used.
• Choose Your Business Structure — Decide if an LLC is the best fit for your business.
• File Documents with the Secretary of State — Turn in your Articles of Organization.
• Pay State Filing Fees — Fees will vary depending on your state.
• Apply for a Tax ID (EIN) — Obtain an Employer identification number from the IRS.

What are the benefits of an S-Corp?

An S-Corp is a type of business structure that offers limited liability protection while allowing income to be taxed like a partnership or sole proprietorship. Profits and losses are “passed through” to its shareholders—avoiding corporate tax—who then report them on their individual tax returns. 

Choosing an S-Corp comes with several benefits for small business owners: 

1. Profits are passed directly to the owner and taxed on their personal tax returns, avoiding the double taxation you’d find with C-Corps. 
2. S-Corps come with liability protection, so personal assets are safe from business debts and lawsuits. 
3. Owners can save on taxes by paying themselves a reasonable salary and taking the remaining profits as “distributions”, which aren’t affected by self-employment taxes. 

What is required to Register as an S Corporation?

To register as an S Corporation, you’ll need:

• Unique Name
• Tax ID (EIN)
• Articles of Incorporation
• Board of Directors — Choose who will be on your business’s governing board.
• Governing Documents (By-laws) — These will vary depending on your state.
• IRS Form 2553 — To elect S-Corp status.
• Business licenses, Permits & Insurance — These will depend on your location and business type.

What are the benefits of a C-Corp?

A C-Corp is a structure that treats the business as a completely separate entity from its owners. In other words, the business can have financial or legal happenings that do not affect the shareholders. 

Similar to an S-Corp, C-Corps offer limited liability protection. The main difference between the S-Corps and C-Corps is stock options and shareholders. C Corps can raise capital by issuing stock and can have an unlimited number of shareholders. 

A C-Corp is ideal for businesses looking to grow significantly. Benefits include:

1. A C-Corp can have as many shareholders as it wants, making it easier to attract investors.
2. Owners (shareholders) aren’t usually liable for the business’s debts and liabilities. Their personal assets are protected.
3. C-Corps has flexibility with types of stock, making it easier to fundraise, control ownership, and vote within the company.

What is required to Register as a C Corporation?

To register as a C Corporation, you’ll need the following:

• Unique Name
• Tax ID (EIN)
• Articles of Incorporation
• Board of Directors
• Governing Documents (By-laws)
• IRS Form 2553 (if electing S-Corp status)
• Business licenses, Permits & Insurance

Organize your business with PetExec Software

Managing all the details of incorporating your pet business can be daunting—which is where PetExec comes in. PetExec software can streamline your planning and execution, from tracking paperwork to managing daily operations. Whichever corporation structure you choose, PetExec provides the tools you need to stay organized and focused on growing your business.