| Who is this entity perfect for? | Multiple-owner business that does not mind complying with administrative formalities and where the exposure to personal liability & complex tax planning is a primary concern. | Sole or multiple- owner business where owner(s) need(s) limited liability but want to be taxed as an individual. Many who consider an LLC also consider a Corporation where they elect S-Corporation status (the LLC and “S-Corp” entities have similarities). | Single-owner business that wants limited compliance responsibilities where taxes or liability (risk of being sued) are not a primary concern. |
| Number of Owners | 1-100 (for S); More than 1 (for C) | One or more | One |
| Types of Owners | S-Corporations are limited to U.S. residents (people who file taxes as U.S. residents) and citizens and to certain trusts/estates; Any (for C-Corporations) | Any | Any |
| What are the advantages? | Limited liability; Capital is easy to raise through sale of stock; Tax savings through income splitting (C only) | Limited liability; Capital is easy to raise through sale of interests; Pass-through taxation to personal income tax return; Unlimited number of owners & no restrictions on owner identity. | Inexpensive to form; Few administrative duties. |
| What are the disadvantages? | More administrative duties; S Corp must have fewer than 100 shareholders and owners must be resident aliens or citizens. | Can be costly to form due to publication requirement. | No tax benefits; Unlimited liability (including personal liability); Business dissolves upon death of owner. |
| Cost of Formation | Moderate | Expensive due to publication requirement. | Low |
| How easy is it to set up? | Most difficult as you must appoint a board, develop bylaws and articles of incorporation, and follow other formalities. | Not difficult but you must create an operating agreement and meet the publishing requirements in your state. | Easy |
| What happens if someone wants to sue the business? Am I protected? | Corporation is a separate legal entity & if someone sues and wins, they cannot come after your personal assets. This is called “limited liability protection.” | Same as Corporation. | You and the business entity are the same person. If your business is sued and the business does not have enough money, they can come after you personally. |
| Will I be subject to tax on the income the business makes and my personal income? Said another way, will I be subject to “double taxation”? | Yes, unless you elect for S-Corp status. The election is free but if you elect this you must be a resident for tax purposes and you will have other ownership restrictions. | No. The income from the business is automatically passed through to your personal income tax return so you are not subject to double tax. | No |
| Can I make an S-election? | Yes | Yes | No |
| Do I have to pay income taxes? | Yes | Yes | Yes |
| Do I have to pay self-employment taxes? | Yes – but if you make an S-election, you will only pay self-employment taxes on the amount you designate as your salary. (This salary must be reasonable to qualify). | Yes – but you can make an S-election so that you only pay self-employment tax on the amount you designate as your salary. | Yes |
| If I am a licensed professional (for example, a lawyer, doctor, accountant, etc.), do I have to set up as a “Special Entity”? | Yes. You must set up a professional corporation and the requirements will be outlined by your state. Also, you must buy malpractice insurance. | Yes. You must set up a professional LLC and the requirements will be set up by your state. Also, you must buy malpractice insurance. | No |
