Choosing the right legal structure for your business is crucial. This initial decision affects how you’re taxed, your liability protection, who else can be part of the business and the ongoing administration cost. This guide covers the three main structures: the Limited Liability Company (LLC), the S-Corporation, and the C-Corporation. Every business is different, and this guide is meant as a starting point for conversation, not a substitute for a consultation tailored to your specific situation.
Limited Liability Company (LLC)
An LLC is the most flexible and commonly used structure for small businesses and solo entrepreneurs. It combines the liability protection of a corporation with the simplicity of a partnership or sole proprietorship.
Liability Protection
Owners (called members) are generally not personally liable for the business’s debts or legal judgments. Personal assets like your home, car, and savings are typically shielded from business creditors, as long as the LLC is properly maintained. If you mix personal and business expenses, you risk losing the liability protection of an LLC.
Taxation
By default, an LLC is a pass-through entity. This means all profits and losses flow through to the owner’s personal tax return, and the business itself does not pay federal income tax. A single-member LLC is taxed like a sole proprietorship to the single owner. A multi-member LLC is taxed like a partnership, where all profits and losses flow to the partners. If the multi-member LLC wishes it can elect to be taxed as an S-Corp or C-Corp. These are described below.
Ownership & Structure
LLCs can have one owner or many, and owners can be individuals, other businesses, or trusts. There is no cap on the number of members and no restriction on who can own one.
Ongoing Formalities
Requirements vary by state, but generally include filing an annual or biennial report, having a registered agent in the state, and maintaining separate business finances. Formal meeting minutes and bylaws are not typically required, though an operating agreement is strongly recommended.
Best For
Freelancers, consultants, real estate investors, and small business owners who want liability protection with minimal administrative overhead.
C-Corporation
A C-Corporation is a fully separate legal and tax entity from its owners. It’s the standard structure for businesses planning to raise outside investment or eventually go public, and it comes with the most formal governance requirements.
Liability Protection
Shareholders are generally not personally liable for corporate debts or legal judgments, provided corporate formalities are properly observed.
Taxation
C-Corps are taxed at the entity level on their profits, and shareholders are taxed again on any dividends distributed to them. This is commonly referred to as double taxation. In exchange, C-Corps have access to a broader range of deductible fringe benefits and are the only structure that can issue multiple classes of stock.
Ownership & Structure
There is no limit on the number or type of shareholders, and ownership can include foreign individuals and entities, venture capital funds, and other corporations. Multiple classes of stock are permitted, which matters for businesses raising institutional investment.
Ongoing Formalities
C-Corps have the most rigorous compliance requirements: a board of directors, annual shareholder meetings, formal meeting minutes, corporate bylaws, and a separate corporate tax return (Form 1120).
Best For
Businesses planning to raise venture capital, issue stock options, or eventually go public, where the ability to attract outside investors outweighs the added tax and administrative complexity.
S-Corporation
An S-Corporation isn’t a business entity type on its own. It’s a tax election made with the IRS, typically by an LLC or a Corporation, that changes how the business is taxed. Most of our clients elect S-Corp status once their business income reaches a level where the tax savings outweigh the added administrative work.
Liability Protection
Liability protection depends on the underlying entity. If the S-election is made on top of an LLC or corporation, that entity’s liability protections still apply.
Taxation
Profits and losses pass through to the owner’s personal return, avoiding the double taxation that applies to C-Corps. The key difference from a default LLC is that owner-employees must pay themselves a reasonable salary subject to payroll tax, while remaining profit can be distributed without self-employment tax. This results in some tax savings. There are other benefits of an S Corp, but this is the primary reason clients elect S-Corp status.
Ownership & Structure
S-Corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents (with limited exceptions for certain trusts and estates). Only one class of stock is allowed.
Ongoing Formalities
In addition to standard entity-level compliance, S-Corps must run payroll for owner-employees, file a separate informational tax return (Form 1120-S), and issue K-1s to shareholders. Reasonable compensation must be documented and defensible.
Best For
Established, profitable businesses (typically $60,000+ in net income) looking to reduce self-employment tax exposure, where the payroll and filing costs are outweighed by the tax savings.
At a Glance: Comparing the Three Structures
LLC | S-Corporation | C-Corporation | |
Liability Protection | Yes, for members | Yes, via underlying LLC or corporation | Yes, for shareholders |
Taxation | Pass-through by default | Pass-through; owner salary + distributions | Entity-level tax, plus tax on dividends (double taxation) |
Ownership Limits | None | Max 100 shareholders; U.S. persons only; one stock class | None; multiple stock classes allowed |
Ongoing Formalities | Low: annual report, registered agent | Moderate: payroll, 1120-S tax return, Schedule K-1s to Owners, reasonable comp | High: board, minutes, bylaws, 1120 c return. |
Best Fit | Freelancers, small businesses, real estate | Profitable businesses reducing self-employment tax | Businesses raising investment or going public |