Corporate Entity Cheatsheet

There’s a lot of information floating around on whether to form a limited liability company (LLC), C-corporation, or S-corporation.  Realizing that it can be pretty difficult to synthesize, I’ve compiled this cheatsheet of sorts to help you decide what’s right for your startup and ultimate goals.

C-CORPORATION

Bottom line: If you intend to raise capital at any point, you probably want to form a C-corp.

  1. Multiple classes of stock – this allows you to give preferred stock to investors, and common to yourself, employees and advisors.
  2. Double taxation – the C-corp gets taxed on its corporate income, as well as shareholder dividends/earnings.
  3. Perpetual life – the C-corp won’t dissolve unless you want it to.
  4. Formalities – a C-corp creates a slew of formalities that aren’t required in an LLC, such as various Board of Director approvals, Shareholder approvals, Action by Incorporator, Annual meetings, and stock plans.
  5. Inflexible payment to shareholders – any payment or dividends from the C-corp must be doled out according to the % of ownership that the shareholder has, and cannot deviate.

S-CORPORATION

Bottom line: You probably won’t be able to raise capital with an S-corp, but you can avoid double taxation and issue stock as payment.

  1. Only one class of stock – it is unlikely that an investor would accept common stock only.
  2. Single taxation – S-corps avoid double taxation, and are only taxed on shareholder earnings, and not corporate income.
  3. Perpetual life.
  4. Formalities.
  5. Inflexible payment to shareholders.
  6. Limited # of shareholders – this is the reason that S-corps are also known as closely-held corporations.  An S-corp is limited to 100 shareholders, and they must all be domestic, US citizens and actual people as opposed to corporate entities.

Limited Liability Company

Bottom Line: LLCs are typically created for tax purposes and with no eye towards expansion, but are easily converted if there is investment potential.

  1. No stock – LLCs cannot issue stock; they can give out ownership of the LLC, but that is considerably more complicated than issuing stock to employees or investors.
  2. Single taxation – LLCs similarly avoid double taxation, and are only taxed on the profits.
  3. Limited life – LLCs can end upon death or incapacity of one of the members.
  4. Fewer formalities – there are no shareholders or directors to deal with.
  5. Flexibility in dividing income – income from the LLC doesn’t have to be doled out solely in accordance with the % of ownership.
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