S corp vs C corp
S Corp vs C Corp vs LLC are the three most popular business entities today. Small business start ups are put in a box where they have to do the LLC vs S corp vs C corp comparisons and pick an entity structure.
A quick comparison of the three, with the advantages and disadvantages of each should help in your S corp vs C corp vs LLC decision.
In the S corp vs C corp vs LLC battle, all three have an identical limited liability (corporate shield) asset protection. It protects the owners and management from liabilities suffered as a result of business activities. In the C corp vs S corp vs LLC decisions, the limited liability shield isn’t really an issue, because each gives good protection.
There is a big caveat on the asset protection value of the corporate shield. It is only effective if the entity, whether LLC vs S corp vs C corp, is set up properly and then managed properly.
In most cases the lawyers (even the slick ones) can get the entity papers filed properly, because the state kicks them back, if they aren’t done right. The LegalDoom sites can set one of the entities up easily, because they are just boiler plate forms.
The by laws and operating agreement are not just standard forms, or at least they shouldn’t be. When you get the lawyer’s last version of his word processing template or the LegalDoom three-easy-steps documents, you’re getting a standard form.
The neat thing about the by laws in a corporation or the operating agreement in an LLC is that you get to write that document.
As long as you are not doing something, illegal the courts will uphold pretty much anything you write in the document. That’s powerful! Do you really want the one size fits all – lowest common denominator documents to govern your business?
The tax choices, when it comes to the C corp vs S corp vs LLC decisions are basically the choice between an S corp and a C corp, because an LLC can be taxed as either corporation, a partnership, or a sole proprietorship – your choice.
The C corp can be used to provide some benefits, such as an HRA plan, for a small business which can’t be done in an S corporation. Note that the LLC can have the benefit plans, etc., associated with whatever tax structure you choose for your LLC.
Generally, a small business doesn’t want to operate as a C corporation, because the only way to get money out of a C corporation is to pay it out in a W2 wage or a dividend.
Dividends are subject to a double tax, because you have to pay income tax on the dividend when you get it, and the C corporation has to pay tax on the dividend before it is paid out. The C corporation can’t deduct the dividend as an expense when it pays it, thus the double tax.
You’ve got to have a very compelling reason before you should operate a small business as a C corp.
In the S corp vs C corp vs LLC decision process, you need to consider the “charging order protection” that the LLC offers. The corporations C or S can’t give you any charging order protection.
Effectively you can double your asset protection with the LLC. My eBook, How to Double Your Asset Protection, will walk you through 15 pages of charging order protection tips. It’s good stuff!! (The eBook AND the charging order protection.)
In the LLC vs S corp vs C corp battle, the LLC is probably the winner for the small business – bottom line.
