(Last Updated On: November 5, 2018)

Ok, I’ll make this quick and dirty.  LLC, C-corp or S-corp for your small business you ask?  I think most small businesses still go with the LLC for the flexibility and to take advantage of the flow through taxation.   Below is a rundown of the main differences.  But be mindful that the recent tax changes pose a whole different set of issues that MUST be discussed with your trusted accountant.  For an explanation of the new tax considerations, see here.

Formation

LLC

C-corp

S-corp

For $200 file articles of organization with Department of State

For about $1300, arrange for publication of LLC and file certificate of publication

For $125 file certificate of incorporation with Department of StateSame as c-corp.  But State and Federal s-corporation tax election required
Draft and execute an operating agreementDraft and execute bylaws, shareholder agreement and issue sharesSame as c-corp

Ownership and Transfer

 One or more membersOne or more shareholdersOne to 100 shareholders, only US residents or citizens
Full membership is not transferrable unless allowed under operating agreement; otherwise only economic transfer permittedShares are transferable unless restricted by shareholder agreement.

There may be registration requirements under securities laws

Same as c-corp
Multiple classes of membership with different rights allowedMultiple classes of shares allowed (common shares/preferred shares)Only one class of shares allowed

Liability

Members are not liable for obligations of LLC

The ten members with the most ownership are liable for unpaid wages of the LLC’s employees

Shareholders are not liable for obligations of the corporation

The ten shareholders with the most ownership are liable for unpaid wages of the LLC’s employees

Same as c-corp

Management

Managed by members unless the formation docs specify management by managersManaged by a board of directors and officerssame as c-corp

Taxes

Flow through entity; the members are directly taxed on the profits and losses allocated to themThe corporation is taxed as a separate entity and the shareholders are taxed again when they receive dividends (aka double taxation)Flow through entity

Formalities

Few if any, biannual statement, no annual meetings requiredregular shareholder meetings; owner payroll taxessame as c-corp

In closing, forming any of the entities above is pretty easy and there is no reason why the small business owner couldn’t do it on his/her own.  However, if you are in business with another person(s), don’t try to save money by drafting your own shareholder agreement or operating agreement, or maybe worse, not have one at all.

 

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.