How to choose between becoming an LLC, S-Corp or C-Corp

When starting a company, there are soooo many questions that are far more complicated to answer than “Should I become an LLC, an S-Corp or a C-Corp?”

But choosing the correct corporate structure for your company has long-lasting implications, so it’s best to get it right. Fortunately, it’s not complicated. In fact, it’s pretty simple. Just follow the flow chart below and you’ll end up with a good idea of the ideal structure for you:

(First a disclaimer: I’m neither an attorney nor an accountant. This information is based on my discussions with many attorneys and accountants over many years and on my own experience in setting up companies as all three structures.)

Infographic - how to decide between LLC and S-Corp and C-corp

Now, some explanations so you understand why the chart flows this way:

  • You’d become an LLC if you didn’t plan on making more than $50k-60k net profit per year and the company will not have investors, but could have a few partners or just be a single person. WHY: because as a member of the LLC, you cannot pay yourself a wage/salary, but you are required to pay employment tax (about 15.2% as of this posting) on your share of the net profit.
  • You’d become an S-Corp if you did plan on making more than $60,000 net profit per year. WHY: The S-Corp election requires you, as an officer, to take a salary. By doing so you are not required to pay employment tax (15.2%) on the remaining profit. You will have the added expense of a payroll services to administer your salary (I use ADP because I’ve got better things to do with my time, and it’s not something I want to mess up). Between payroll and the tax return there is an additional $2,500-$3,000 of operating expense for an S-Corp, but as your income grows the tax savings can offset this. Regardless of whether you become an S-Corp, you’ll start as an LLC and elect to become an S-Corp.
  • You’d become a C-Corp if you plan on going public, otherwise don’t do this because you’ll pay taxes on your net profits twice – first as the corporation, and then on any salary you take from the company. And the filings are more involved, which means more expensive.

Missing from this is the option for becoming a Sole Proprietor. I don’t recommend it, here’s why: The benefit is that you don’t have to do anything up front, just claim revenue and expenses on a Schedule C on your personal tax return. The downside, according to my accountant, is that Schedule C is one of the most frequently audited returns, which is reason enough. That, and there is no legal separation between you and the business as a Sole Proprietor, so if someone sues “the business”, it’s you and all of your personal world that’s up for grabs. An LLC provides separation between the two and better protects your personal assets.

If you’d like to dive a little deeper, this article from Entrepreneur describes nuances that may affect your decision making process, and this one from the SBA provides an overview of every option. Generally speaking I start all of my companies as an LLC, switch to an S-Corp when it makes sense financially, and would only ever become a C-Corp if I was taking the company public or needed to amass lots of or various classes of investors.

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