What Is the Difference Between a C Corp, a S Corp, and an LLC?

If you want the success of your business, you first need to ensure that you choose the right business structure.

The form of business that you choose will determine some important things, such as the income tax return form you have to file.

Now, when it comes to shortlisting, many consider C Corp, S Corp, and LLC.

But what is the difference between a C Corp, a S Corp, and an LLC? Well, it all boils down to the business that you are planning to start and the tax.

Want to get the entire story? Read this discussion till the end because we will break each business type down and let you know what makes them different.

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What Exactly Is an S Corp and How Is It Different?

We need to start with S Corp because it is not technically a business structure. Instead, it is a tax status.

Otherwise called the small business corporation, S Corp mainly offers the advantages of getting similar tax advantages to a corporation but with double taxations.

Now, to receive the S Corp status, you must first register as a C Corp or LLC. After that, you must send the S Corp form to the IRS. That will indicate that you want to tax the business as an S Corp.

In other words, you can not directly register your business as an S Corp. That is not possible, even though online legal services might tell you it is.

Again, why would you want to get an S Corp status when you have started as LLC or C Corp? It all boils down to saving money on taxes!

That means the main difference that lies between LLC, C Corp, and S Corp is the taxation structure. And this structure can let you save money on taxes.

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What Is LLC and What Makes It Stand Out?

As we have mentioned earlier, an S Corp will let you save money on taxation. So, why is LLC relevant?

Well, if you are making as less or much as what you could generally make doing a similar role at another company, you can not save money on the tax.

For example, if you have a 40k USD net profit and 40k USD “reasonable” salary for the position, you could just stay as an LLC instead of opting for the S Corp taxation status.

It would be better to stay as an LLC because you will not need to go through the additional paperwork.

Additionally, you would need to set up a payroll when you have an S Corp status. You must take out self-employment taxes every month and document paying yourself a salary.

Those can be a lot of hassle for many. In short, LLC offers simplicity for many businesses. And that is what makes it stand out.

Now, the same thing is applicable when you compare it with C Corp. As a C Corporation, you would need to file your own tax returns.

On the other hand, LLCs are considered pass-through entities, meaning they do not have to file taxes in their own right. Instead, they have their income reported.

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What Is C Corp and What Makes It Different?

C Corp is a legal entity that is distinct from the owners of the business. The corporation is responsible for all debts and liabilities, not the owners.

This protection is what makes C Corp stand out the most. But that is not all. A C Corp, like an S Corp, can help you save money, although in a different way.

You see, with an LLC and S Corp, all of the profits need to be paid out. On the other hand, with a C Corp, you can keep the profits within the business.

For example, if your business earns 100k USD in net profit, you could pay yourself 75k USD and keep the rest 25 USD within the business. It will be called retained earnings.

The business’s retained earnings will be kept in a separate account, and the best part is that they will be exempted from taxations. And a buildup of retained earnings can substantially increase the company’s net worth.

Other than that, some factors will force you to choose a C Corporation. For example, you must select C Corp if you have more than 100 shareholders.

An S Corp can only have 100 shareholders. Also, if any of the shareholders are foreign, you can not choose S Corp, regardless of whether you have less than 100 shareholders or not.

Furthermore, compared to LLC and S Corp, C Corp is more investor friendly. And as we have mentioned, you can keep the profits within the business without being taxed double.

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Final Words

So, in terms of what is the difference between a C Corp, a S Corp, and an LLC, it mainly depends on the business. If it is small, S Corp makes more sense.

And if your business is not small but you prefer simplicity, LLC is the way to go. Finally, if you want to keep retained earnings without double taxation, C Corp is for you!