Should you choose an S-Corp, C-Corp, or LLC?

Choosing the right business entity can be one of your most important financial decisions. Whether you’re starting a new business or restructuring an existing one, how you organize your company can have wide-reaching implications, especially regarding taxes, liability, and long-term growth.

Let’s examine the differences between the most common structures: LLC, S-Corp, and C-Corporation, and explore how each might align with your financial goals.

What is an LLC?

An LLC, or Limited Liability Company, is one of the most flexible business structures. It blends the simplicity of a sole proprietorship or partnership with the liability protection of a corporation.

From a tax perspective, the IRS doesn’t recognize an LLC as a distinct taxable entity. Instead, it’s treated as a pass-through entity by default. That means the profits and losses pass through to your tax return.

When forming a Limited Liability Company (LLC), one of the key decisions you’ll face is how your business will be taxed. While an LLC typically enjoys the benefits of pass-through taxation (which means profits and losses are reported on your tax return), you also have the flexibility to elect for your LLC to be taxed as an S-Corporation or C-Corporation if that aligns better with your business objectives and financial situation.

Choosing to tax your LLC as an S-Corp can benefit certain businesses, especially those expecting to generate significant profits. This designation allows you to save on self-employment taxes because only your salary (not your distributions) is subject to these taxes.

Moreover, S-Corps can provide some tax advantages by allowing for certain deductions that may not be available to standard LLCs.

Opting for C-Corp taxation can be advantageous if you reinvest your profits into the business rather than taking them as income. C-Corps are taxed at the corporate level, which might result in a lower overall tax rate depending on your profit levels and personal income.

This structure could make it easier to attract investors or raise capital because C-Corps can issue multiple classes of stock without limitations on the number of shareholders.

Consulting with a tax professional or accountant who understands your situation can provide valuable insight and help you make an informed decision that aligns with your business strategy.

What is an S-Corp?

An S-Corp is a tax classification. Eligible businesses (including LLCs and corporations) can elect to be taxed as an S-Corp by filing IRS Form 2553.

S-Corps are also pass-through entities, but they offer a critical distinction: only shareholder-employee salaries are subject to self-employment taxes. Any remaining profits can be distributed as dividends, potentially lowering your overall tax burden.

However, the IRS requires S-Corp owners who perform services for the company to pay themselves a “reasonable salary.” This can invite scrutiny if the salary is seen as too low.

What is a C-Corp?

A C-Corp is a completely separate tax entity. It pays corporate income tax on its profits, and any dividends paid to shareholders are taxed again on their returns, resulting in double taxation.

However, C-Corps offer significant advantages for growth-focused businesses. They can have unlimited shareholders, issue multiple classes of stock, and are favored by venture capitalists and institutional investors.

The flat corporate tax rate (currently 21%) may also make sense in specific high-income scenarios.

Which structure is right for you?

Each entity has trade-offs. Here’s a quick summary to help you decide:

Here are a few general guidelines:

• Choose an LLC if you value flexibility and simplicity, and you’re not planning to raise outside capital.
• Consider an S-Corp if you’re profitable, actively involved in the business, and want to reduce self-employment taxes.
• Opt for a C-Corp if you plan to grow quickly, attract investors, or go public someday.

Other considerations

Don’t forget to think about:

• State taxes : Some states impose franchise taxes or minimum fees based on your chosen business structure.
• Retirement plans : S-Corps and C-Corps may offer more flexibility in setting up tax-advantaged retirement plans.
• Health benefits : Certain structures allow for better tax treatment of healthcare premiums and other benefits.
• Exit strategy : How you plan to sell or pass down the business can influence your structure today.

Final thoughts

There’s no one-size-fits-all answer. Your optimal structure depends on tax goals, financial planning needs, long-term vision, and operational considerations.

Veritas Wealth Management collaborates with your CPA and attorney to assess your entire financial picture.

Disclaimer: This material is for informational purposes only and is not intended to be a substitute for individualized legal or tax advice. Please consult your legal or tax advisor regarding your specific situation.