7 ms·

C Corporation vs S Corporation vs LLC

58 points by matt1 18y ago

dawie 18y ago
Which one do most startups choose? LLC?
- tptacek 18y ago
  LLC, though you won't take outside funding without switching to a C corp.
  - aneesh 18y ago
    How hard is it to switch?
    - tptacek 18y ago
      From LLC to S/C? Annoying. From S to C? Very easy.
- skmurphy 18y ago
  Most folks I know who run the numbers choose Sub-S over LLC in CA. The tax treatment is less favorable for LLC.
micks56 18y ago
FYI: Massachusetts is the only jurisdiction in the US (that I am aware of) that requires at least 2 members for an LLC.
- matt1 18y ago
  "Contrary to what you may have read just a few years ago, you can now form an LLC with just one person in any state (or the District of Columbia)" - Pg 16, Nolo's Quick LLC I happen to have read this last night :)
tptacek 18y ago
The advantage to going as far as an LLC is that LLCs can be invoiced and can cut PO's. It's also the bare minimum you need if you have cofounders. Buried in this table is the major difference between LLC, S, and C: * Any team member who has equity in an LLC is a member, a.k.a. partner, and members can't take W2 wages, only distributions. * Conversely, employees of LLCs can't technically hold equity. * Any external investor in an LLC (probably) must be an SEC "accredited investor", meaning that they have $1MM in the bank or several years of income over $200k. * The major difference between S and C seems to be that C corps can have preferred (ie, VC) stock. The long and the short of it is that equity is a mess until you're a C corp, and then everything else becomes a mess.
- vaksel 18y ago
  whats a PO?
  - jmatt 18y ago
    purchase order http://en.wikipedia.org/wiki/Purchase_order http://en.wikipedia.org/wiki/Purchase_order
  - tptacek 18y ago
    When you buy stuff by printing your own credit cards.
  - callmeed 18y ago
    Sell a product to a government or school and you'll find out ... usually about 3 months after they contact you to buy.
- Tritis 18y ago
  S-Corps aren't double taxed like C-corps. the S-Corp can pass through all profits and have those taxes as income of the shareholders.
timae 18y ago
We just went through this decision process. Ended up doing S-Corp for the following reasons: LLC vs S-Corp: 1. Membership interest vs. Stock: Shares of stock are easier to deal with than membership interests, from an investor and giving to employee perspective. 2. Taxes: Every dollar you take out of LLC is salary (and subject to payroll taxes). In an S-Corp, any money you take out of the business after paying yourself a "normal" salary is a distribution and free of payroll tax. 3. The costs to set-up are nearly the same if you're able to create the articles of incorporation, corporate by-laws, and initial meeting minutes yourself (required for S-Corp). Not that difficult with Google and a $17 book from Barnes & Noble. 4. Conversion to C-Corp if we raised VC money: Much easier to convert from S-Corp. C-Corp vs. S-Corp: 1. Losses: We expect to incur losses in year 1. In a C-Corp, those can be carried forward to subsequent years in which you have a gain, but in an S-Corp, you can take them on your personal return in that year. 2. Double-taxation: If you only plan to pay a salary, then there is no double taxation, because that's deductible from the C-Corp, however, if you take a distribution, that would be taxed at both the corporate and personal level with the C-Corp (only at the personal level in S-Corp). 3. Investors: Will have to convert to C if we raised VC money, but that's not the plan in the near term, and its easy to switch if we need to. 4. A potential downside to the S-Corp for taxes is that the profits will be taxed at your marginal tax rate (because its all incremental income) as opposed to going through the levels of the progressive tax structure as it would in a C corp. If you only plan to pay yourself a normal salary, then C could be the way to go depending on how much you expect to make.
- tptacek 18y ago
  Careful on (2) --- audit flag! You only owe self-employment on the first ~90k of your income anyways. I might not play games here.
  - timae 18y ago
    No games. If your normal salary is $100,000 and you want to distribute $1,000,000, that's where this comes into play. And the limit is only on a portion of the FICA taxes (it's actually $100k). More clearly, the business pays social security tax of 6.2% of each of its employees' salaries up to $100k and medicare tax of 1.45% of each of its employees' salaries with no limit. So, if you take $1,000,000 from the business in a year and $100,000 is your normal salary, Then the business would pay $20,700 in FICA tax under an LLC and $7,650 under an S-Corp.
sanj 18y ago
S-Corps cannot have non-US residents. That forced us into an LLC (and since, into a C-corp). I'd suggest you talk to a lawyer. 90% of them will be able to cut you a deal on a simple C-corp.
matt1 18y ago
Newb question -- I don't really get the asset protection part of limited liability. Say I sell my house to fund my business, then my LLC flops and I have to declare bankruptcy. I still lost my house, no? Now say I take a loan out for $70K to fund my LLC and it flops and I have to declare bankruptcy. Then do I get to keep my house? What's the difference?
- skmurphy 18y ago
  If your LLC flops (or your C corp or Sub-S corp) you don't have to declare bankruptcy provided you haven't pledged your personal assets to the company or it's creditors. Your LLC/C/Sub-S creditors can't come after your house or other assets unless you have personally pledged them at some point.
  - matt1 18y ago
    I'm still missing something. Clarified hypothetical situation: Situation 1: I have a house worth $250K. I sell it and use $100K to fund my business. My business flops; I'm out the $100K. Situation 2: I keep my $250K house and get a loan from my bank for $100K. My business flops; creditors can't come after my house because I'm behind the LLC firewall, right? Why would anyone ever choose situation 1?
    - ensignavenger 18y ago
      Perhaps- but if in situation 2, you pledged your house as collateral, the creditor can still come after it. Generally, if your business is new and unproven, the bank will require you to sign a personal guarantee- or even to put up your house as collateral. Which means that they can still come after it! If your business gets the loan, with no collateral, and no personal guarantee, then if the business goes bankrupt, the creditors can't come after personal assets! If you are lucky enough to find a bank willing to lend you 100,000 with no collateral, then go for it!
    - skmurphy 18y ago
      In Situation 2 you have pledged your house against the 100K loan, the fact that an LLC is involved is immaterial. There is nothing that can protect you when you want to take equity out of your house and you lose all of the money. Situation 3, you borrow money to start your business, it takes off, you pay it back and your business continues to grow. Later you are sued and lose a 10M lawsuit wiping out all of the assets in your business and then some. If you have a corporation your personal assets are normally protected from this loss. Alternatively your large and growing business is struck by a meteorite (which can come in many forms) that wipes out all of your assets but leaves you with the liabilities. If you are incorporated winding down the business normally doesn't affect your personal assets.
ensignavenger 18y ago
Interesting- in Missouri, an LLC can choose to be taxed as a Proprietorship or a Corporation. I don't know how other states do it.
chaostheory 18y ago
overall it's a useful chart... I just didn't like the liability part for LLCs. To me (a lawyer could prove me wrong - I'm not a lawyer), LLC (and I think S corp) members have the same liability as a proprietorship if they are company operators (ie not just a passive investor).
willhf 18y ago
What do ycombinator startups incorporate as?
- gasull 18y ago
  Delaware C corporations.
startingup 18y ago
Has anyone switched from a C to S corp (yes, you read that right)? How painful was it? Here is the situation: an existing small, moderately profitable company has decided to stay out of VC circuit, stay private, run it as a life-style business. C corp involves double taxation, which S corp avoids. They had grander dreams once (hence C corp) but now the situation has changed.

58 points by matt1 18y ago

dawie 18y ago

Which one do most startups choose? LLC?

tptacek 18y ago
LLC, though you won't take outside funding without switching to a C corp.
- aneesh 18y ago
  How hard is it to switch?
  - tptacek 18y ago
    From LLC to S/C? Annoying. From S to C? Very easy.
skmurphy 18y ago
Most folks I know who run the numbers choose Sub-S over LLC in CA. The tax treatment is less favorable for LLC.

micks56 18y ago

FYI: Massachusetts is the only jurisdiction in the US (that I am aware of) that requires at least 2 members for an LLC.

matt1 18y ago
"Contrary to what you may have read just a few years ago, you can now form an LLC with just one person in any state (or the District of Columbia)" - Pg 16, Nolo's Quick LLC I happen to have read this last night :)

tptacek 18y ago

The advantage to going as far as an LLC is that LLCs can be invoiced and can cut PO's. It's also the bare minimum you need if you have cofounders. Buried in this table is the major difference between LLC, S, and C: * Any team member who has equity in an LLC is a member, a.k.a. partner, and members can't take W2 wages, only distributions. * Conversely, employees of LLCs can't technically hold equity. * Any external investor in an LLC (probably) must be an SEC "accredited investor", meaning that they have $1MM in the bank or several years of income over $200k. * The major difference between S and C seems to be that C corps can have preferred (ie, VC) stock. The long and the short of it is that equity is a mess until you're a C corp, and then everything else becomes a mess.

vaksel 18y ago
whats a PO?
- jmatt 18y ago
  purchase order http://en.wikipedia.org/wiki/Purchase_order http://en.wikipedia.org/wiki/Purchase_order
- tptacek 18y ago
  When you buy stuff by printing your own credit cards.
- callmeed 18y ago
  Sell a product to a government or school and you'll find out ... usually about 3 months after they contact you to buy.
Tritis 18y ago
S-Corps aren't double taxed like C-corps. the S-Corp can pass through all profits and have those taxes as income of the shareholders.

timae 18y ago

We just went through this decision process. Ended up doing S-Corp for the following reasons: LLC vs S-Corp: 1. Membership interest vs. Stock: Shares of stock are easier to deal with than membership interests, from an investor and giving to employee perspective. 2. Taxes: Every dollar you take out of LLC is salary (and subject to payroll taxes). In an S-Corp, any money you take out of the business after paying yourself a "normal" salary is a distribution and free of payroll tax. 3. The costs to set-up are nearly the same if you're able to create the articles of incorporation, corporate by-laws, and initial meeting minutes yourself (required for S-Corp). Not that difficult with Google and a $17 book from Barnes & Noble. 4. Conversion to C-Corp if we raised VC money: Much easier to convert from S-Corp. C-Corp vs. S-Corp: 1. Losses: We expect to incur losses in year 1. In a C-Corp, those can be carried forward to subsequent years in which you have a gain, but in an S-Corp, you can take them on your personal return in that year. 2. Double-taxation: If you only plan to pay a salary, then there is no double taxation, because that's deductible from the C-Corp, however, if you take a distribution, that would be taxed at both the corporate and personal level with the C-Corp (only at the personal level in S-Corp). 3. Investors: Will have to convert to C if we raised VC money, but that's not the plan in the near term, and its easy to switch if we need to. 4. A potential downside to the S-Corp for taxes is that the profits will be taxed at your marginal tax rate (because its all incremental income) as opposed to going through the levels of the progressive tax structure as it would in a C corp. If you only plan to pay yourself a normal salary, then C could be the way to go depending on how much you expect to make.

tptacek 18y ago
Careful on (2) --- audit flag! You only owe self-employment on the first ~90k of your income anyways. I might not play games here.
- timae 18y ago
  No games. If your normal salary is $100,000 and you want to distribute $1,000,000, that's where this comes into play. And the limit is only on a portion of the FICA taxes (it's actually $100k). More clearly, the business pays social security tax of 6.2% of each of its employees' salaries up to $100k and medicare tax of 1.45% of each of its employees' salaries with no limit. So, if you take $1,000,000 from the business in a year and $100,000 is your normal salary, Then the business would pay $20,700 in FICA tax under an LLC and $7,650 under an S-Corp.

sanj 18y ago

S-Corps cannot have non-US residents. That forced us into an LLC (and since, into a C-corp). I'd suggest you talk to a lawyer. 90% of them will be able to cut you a deal on a simple C-corp.

matt1 18y ago

Newb question -- I don't really get the asset protection part of limited liability. Say I sell my house to fund my business, then my LLC flops and I have to declare bankruptcy. I still lost my house, no? Now say I take a loan out for $70K to fund my LLC and it flops and I have to declare bankruptcy. Then do I get to keep my house? What's the difference?

skmurphy 18y ago
If your LLC flops (or your C corp or Sub-S corp) you don't have to declare bankruptcy provided you haven't pledged your personal assets to the company or it's creditors. Your LLC/C/Sub-S creditors can't come after your house or other assets unless you have personally pledged them at some point.
- matt1 18y ago
  I'm still missing something. Clarified hypothetical situation: Situation 1: I have a house worth $250K. I sell it and use $100K to fund my business. My business flops; I'm out the $100K. Situation 2: I keep my $250K house and get a loan from my bank for $100K. My business flops; creditors can't come after my house because I'm behind the LLC firewall, right? Why would anyone ever choose situation 1?
  - ensignavenger 18y ago
    Perhaps- but if in situation 2, you pledged your house as collateral, the creditor can still come after it. Generally, if your business is new and unproven, the bank will require you to sign a personal guarantee- or even to put up your house as collateral. Which means that they can still come after it! If your business gets the loan, with no collateral, and no personal guarantee, then if the business goes bankrupt, the creditors can't come after personal assets! If you are lucky enough to find a bank willing to lend you 100,000 with no collateral, then go for it!
  - skmurphy 18y ago
    In Situation 2 you have pledged your house against the 100K loan, the fact that an LLC is involved is immaterial. There is nothing that can protect you when you want to take equity out of your house and you lose all of the money. Situation 3, you borrow money to start your business, it takes off, you pay it back and your business continues to grow. Later you are sued and lose a 10M lawsuit wiping out all of the assets in your business and then some. If you have a corporation your personal assets are normally protected from this loss. Alternatively your large and growing business is struck by a meteorite (which can come in many forms) that wipes out all of your assets but leaves you with the liabilities. If you are incorporated winding down the business normally doesn't affect your personal assets.

ensignavenger 18y ago

Interesting- in Missouri, an LLC can choose to be taxed as a Proprietorship or a Corporation. I don't know how other states do it.

chaostheory 18y ago

overall it's a useful chart... I just didn't like the liability part for LLCs. To me (a lawyer could prove me wrong - I'm not a lawyer), LLC (and I think S corp) members have the same liability as a proprietorship if they are company operators (ie not just a passive investor).

willhf 18y ago

What do ycombinator startups incorporate as?

gasull 18y ago
Delaware C corporations.

startingup 18y ago

Has anyone switched from a C to S corp (yes, you read that right)? How painful was it? Here is the situation: an existing small, moderately profitable company has decided to stay out of VC circuit, stay private, run it as a life-style business. C corp involves double taxation, which S corp avoids. They had grander dreams once (hence C corp) but now the situation has changed.