Entrepreneur’s Guide to Business Structures

Choosing the right business structure is crucial, as it affects taxation, liability, ownership and the operations of your company. There are three main business structures that often rise to the top for many entrepreneurs. Here is your guide to the three most common and what to consider when deciding which may be right for you and your business.

C Corporation (C Corp)

• Overview: A traditional corporation that is treated as a separate legal entity from its owners. Tend to be larger companies.
• Taxation: C Corps face “double taxation”—the corporation itself pays corporate income tax, and shareholders pay personal income tax on dividends and profits.
• Ownership: No limit on the number or type of shareholders. Ownership is easily transferable through stock sales, making it attractive to investors and providing the potential for going public.
• Liability: Owners (shareholders) have limited liability, meaning their personal assets are protected from business debts and claims.

• Advantages:

  • No restrictions on the number of shareholders.
  • Can offer multiple classes of stock, making it easier to attract venture capital.
  • Business expenses are deductible, and fringe benefits can be provided tax-free to employees.

• Disadvantages:

  • Double taxation on corporate profits and shareholder dividends.
  • Higher administrative requirements, including board meetings, detailed records, and annual reporting.

S Corporation (S Corp)

• Overview: A type of corporation that avoids double taxation by allowing income to pass directly to shareholders. To qualify as an S Corp, a business must meet certain IRS criteria.
• Taxation: S Corps have “pass-through” taxation—profits and losses pass through to shareholders’ personal tax returns, avoiding corporate income tax. The business itself is not taxed at the corporate level.
• Ownership: Limited to 100 shareholders, who must be U.S. citizens or residents. S Corps can only issue one class of stock.
• Liability: Limited liability for shareholders, similar to C Corps.

• Advantages:

  • Avoids double taxation with pass-through taxation.
  • Allows shareholders to take a reasonable salary plus distributions, potentially reducing Social Security and Medicare taxes.

• Disadvantages:

  • Ownership restrictions (only U.S. citizens/residents and a maximum of 100 shareholders).
  • Can have only one class of stock, limiting investment flexibility.
  • Stricter eligibility requirements and compliance rules than LLCs.

Limited Liability Company (LLC)

• Overview: A flexible business structure that combines the liability protection of a corporation with the tax advantages of a sole proprietorship or partnership.
• Taxation: LLCs have “pass-through” taxation by default (profits and losses flow through to members’ personal tax returns most often on Schedule K-1), but they can choose to be taxed as an S Corp or C Corp.
• Ownership: No limits on the number or nationality of members (owners). Ownership can be transferred, but it may be more complex than transferring shares in a corporation.
• Liability: Members have limited liability, protecting personal assets from business debts and liabilities.

• Advantages:

  • Highly flexible structure and fewer compliance requirements than S and C Corps.
  • Pass-through taxation by default, with options to be taxed as a corporation.
  • Limited liability and no restrictions on the number or type of members.

• Disadvantages:

  • Some states impose LLC-specific taxes or fees.
  • Can be more complex to transfer ownership than corporations.
  • Potentially limited options for raising capital, as LLCs cannot issue stock.

Comparison Summary

Read Also: Entrepreneur’s Guide to Retirement Plans

Each business structure has unique pros and cons. The decision often centers on factors like tax preferences, ownership flexibility, administrative capacity, and growth ambitions. Contact Tull Financial Group today at (757) 436-1122 to discuss your distinct business needs and to schedule a free initial consultation