The table below outlines some of the key pros and cons of the three most common entity types.

This is a simplified chart that does not address all the considerations relevant or important  to you and your business, nor does it address other available choices.  For example, this chart does not address structures that could involve multiple entities.

Tax and legal considerations are very complex and the following does not constitute tax or legal advice.  You are strongly urged to consult a tax advisor. 

In addition, as Congress and the Administration debate enacting fundamental reforms to the U.S. tax system, note that any such legislation could affect the considerations discussed below. You can read more about potential U.S. tax reform here.

Business Entity Pros Cons

C Corporation

(corporation that has not filed an S election with the IRS)

  • Benefits from the familiarity most people have with C Corporations as compared to LLCs
  • Limits shareholder liability
  • Offers continuity of existence
  • Governed by a robust body of law established for Delaware corporations
  • Allows company to offer employees equity awards that are more familiar to employees
  • Benefits from well-established precedent and procedures for formation and most common corporate actions, which can result in reduced legal and other costs 
  • Taxes income at the entity and shareholder levels. However, shareholder-level tax may be reduced or eliminated on a later sale by the “qualified small business stock” (“QSBS”) rules if the relevant requirements are met
  • The corporation’s losses cannot be deducted against a stockholder’s income
  • Business cannot generally be extracted from the C corporation (nor can the C corporation be converted to an LLC),  without corporate-level tax on the appreciation or value growth 

S Corporation

(corporation that has filed an S election with the IRS)

  • Pass-through federal income tax treatment – generally no federal income tax at the entity level, absent special circumstances
  • Limits shareholder liability
  • Offers continuity of existence
  • Governed by a robust body of law established for Delaware corporations
  • Allows company to offer employees equity awards that are more familiar to employees
  • Benefits from well-established precedent and procedures for formation and most common corporate actions, which can result in reduced legal and other costs 
  • Restricts stock issuance to a single class of stock
  • No preferred stock is permitted
  • Compared to an LLC (or partnership), little flexibility in allocation of profits and losses
  • Limits number of shareholders (no more than 100) (can also restrict wide availability of traditional option awards)
  • Restricts identity of shareholders (must be individuals, estates or certain qualified trusts; shareholders cannot be non-resident aliens)
  • Taxes income currently at the shareholder level regardless of whether cash distributions are made 

Limited Liability Company 

  • Limits liability for owners (called members)
  • Provides pass-through federal income tax treatment – generally no federal income tax at the entity level (assuming that no election has been filed to treat the LLC as a corporation for income tax purposes)
  • Provides greater flexibility with respect to number of members, types of members, and ability to issue multiple classes of ownership interests as compared to an S corporation 
  • Provides greater flexibility from a governance and profit-sharing perspective as compared to a C or an S corporation 
  • Conversion to a corporation may be required for an IPO and may be preferred for a sale transaction
  • Venture capital, tax-exempt and non-U.S. investors typically do not invest in LLCs for regulatory and tax reasons (though conversion to a C Corporation can be undertaken when such investments are contemplated)
  • Traditional equity awards, such as options and restricted equity, may be viewed by recipients as more complex and must be structured differently than in a corporation
  • Income of the business is taxed currently at the member level regardless of whether cash distributions are made
  • Setup and operating costs and complexity can be greater than with corporations 
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