C-Corp vs S-Corp vs LLC

Team Digits

Published February 06, 2025

C Corp vs. S Corp vs. LLC: Which is the Best For Your Startup

Not sure about the best business structure for your new business? In this guide, we break down the key differences between C corps, S corps, and LLCs in plain English to help you figure out which suits your startup the best.

TL;DR: C corp vs. S corp vs. LLC

Don’t have time to read the whole thing? No problem — here’s a quick cheat sheet:

What is a C corp?

A C corp (or a C corporation) is a business structure where the owners or shareholders are taxed separately from the business entity. It’s the most common type of corporation due to its built-in liability protection and its attractiveness to investors.

A C corp is basically a fundraising magnet, which makes it the go-to choice for startups looking to raise venture capital.

C corp pros and cons

Pros:

• Limited personal liability for owners and shareholders
• The ability to issue and sell shares of stock to acquire capital
• Ease of transferring ownership by selling stock

Cons:

• Higher legal fees compared to other business structures
• Subject to greater legal regulation
• Profits are taxed twice (first when filing income taxes and then again when distributing dividends)

How to form a C corp

Looking to form a C corp? Follow these steps:

1. Decide on a business name

The first step to forming a C corp involves deciding on a name for your business.

The name will need to be unique in your state of incorporation — in other words, you can’t choose a name that’s already used by another business entity in that state.

Here, you’ll want to come up with a few different names. This will ensure you have a few options in case any of your name ideas have already been taken.

2. Designate a registered agent

A registered agent is an individual or a company that’s responsible for receiving legal notices for your business. They need to be located in the same state your business is incorporated in.

You can find a registered agent online or by visiting your Secretary of State’s website.

There’s also the option to designate yourself as your company’s registered agent. If you’re the type of person who enjoys receiving mail from the government, that is.

3. Draft and file Articles of Incorporation

The Articles of Incorporation include all the essential information about your corporation, including the business name, registered agent, a description of the business’ purpose, and the names and addresses of the directors.

Think of it as your company’s birth certificate.

You can usually find a sample Articles of Incorporation document on your Secretary of State’s website. Once you draft the document, you’ll need to file it with your Secretary of State’s office.

4. Appoint directors

Every C corporation needs to have a board of directors who are responsible for daily operations. The board sets corporate policies, approves major decisions, appoints officers (e.g., CFO, CMO, etc.), and issues stock.

Some states also require a minimum number of board meetings. However, a board can decide to have additional meetings if needed.

The board of directors is usually elected by shareholders. This is done by vote at the annual shareholder meeting, with directors being elected by a majority vote.

If your corporation doesn’t have shareholders, you can appoint the board of directors yourself as the CEO or President of the corporation. The minimum number of directors for a corporation is set by state laws — usually, the requirement is to have at least one director.

5. Issue stock

Issuing stock is necessary when founding a C corp. It needs to have at least one shareholder in order to be a valid corporation.

A C corp can also issue shares of stock to raise capital. These shares are distributed to shareholders and act as evidence of their ownership in the company.

C corps can issue two types of stock: common stock and preferred stock. Common stakeholders have the ability to vote on the future of the corporation, but they receive dividends after preferred stakeholders (who don’t have voting rights).

6. Apply for licenses and permits

Depending on the nature of your business and the state in which it’s incorporated, you’ll likely need to apply for one or more licenses or permits.

For example, if you plan on selling physical products in the state of New York, you’ll need to apply for a sales tax permit from the New York State Department of Taxation and Finance.

Once you’ve obtained the required permits, you’ll be able to start doing business.

What is an S corp?

An S corp (or an S corporation) is a type of business structure that passes business income, losses, credits, and deductions to its shareholders. The shareholders then report these items on their personal tax returns.

Think of it as a C corp on a tax diet — there’s no double taxation (like with a C corp), so you end up with more money in your pocket.

S corp pros and cons

Pros:

• Protection for shareholders’ personal assets
• Pass-through taxation
• Tax benefits (shareholders can draw wages or receive dividend distributions)

Cons:

• Only allowed to issue one class of stock
• Limited to 100 shareholders
• Taxable fringe benefits

How to form an S corp

Follow these steps to form an S corp:

1. Choose a business name

Start by choosing a name for your business. It will need to be a unique name that’s not used by any other business entity in your state of incorporation.

You can use the business registry on your Secretary of State’s website to check if a specific name is taken or not.

2. Decide on a registered agent

When forming an S corp, you’ll need to designate a registered agent who will be responsible for receiving legal notices for your business.

This can be any legal entity — including an individual or a company. You can usually find a list of reputable registered agents on your Secretary of State’s website. You can also designate yourself as the registered agent for your company.

3. File Articles of Incorporation

Articles of Incorporation is an essential document that outlines your company’s name, registered agent, type and purpose, and management structure.

You can usually find a sample Articles of Incorporation document on your Secretary of State’s website. Use it as a guide to draft your own Articles of Incorporation.

4. Issue stock

You need to issue stock when founding an S corp in order to define ownership. An S corp can issue stock to up to 100 shareholders.

Unlike C corps, an S corp can only issue one type of stock: common stock (a type of stock that grants shareholders voting rights). Issuing preferred stock (a type of stock that gives shareholders priority when receiving dividends but doesn’t grant voting rights) isn’t allowed for S corps. Additionally, S corp shareholders must be US citizens or permanent residents.

5. Elect a board of directors

An S corp needs to have at least one director. This can be the founder or another person. An S corporation can also have multiple directors who become their board.

The board of directors will be responsible for the company’s daily operations, such as setting corporate policies, approving major decisions, and appointing officers.

6. S corp election

To gain S corp status, you’ll need to file Form 2553 (“Election by a Small Business Corporation”) with the IRS. This is a form through which you elect your business to be an S corp.

The form will need to be signed by all of your company’s shareholders.

7. Apply for business licenses

Before you can start doing business, you’ll need to apply for the appropriate licenses and permits required by your state of incorporation.

Once you receive the necessary licenses, you’ll be able to start generating new customers and revenue for your business.

For example, a CPA firm in the state of California would need a Certified Public Accountant (CPA) license from the California Board of Accountancy before being ready to do business.

What is an LLC?

An LLC (Limited Liability Company) is a business structure that provides its owners with limited liability and offers pass-through taxation. Owners of an LLC are called “members” — these can be individuals, corporations, or other LLCs.

LLC pros and cons

Pros:

• Personal liability protection
• No double taxation
• Ease of formation

Cons:

• Inability to issue stock
• Self-employment taxes
• Potentially complicated ownership transfer

How to form an LLC

1. Decide on your business’s name

The first step to forming an LLC involves deciding on a name for your business.

To be approved, the name will need to be unique in your state of incorporation. In other words, there can’t be an existing business entity with the same name in your state.

2. Select a registered agent

Your LLC needs to have a registered agent who will receive legal notices related to your business.

This can be an individual or a company. You can also act as your own registered agent.

3. Prepare an operating agreement

Your LLC needs to have an operating agreement that outlines how the company will be operated, including how ownership, labor, and profits are going to be distributed. It should also include information about which members are responsible for which duties within the company.

It’s not legally required to have an attorney draft your operating agreement, but it’s recommended for more complex agreements. You can also find plenty of operating agreement templates online.

All LLC members need to sign the operating agreement. Keep in mind that the operating agreement is an internal document — it doesn’t need to be filed with the state.

4. File Articles of Organization

The Articles of Organization outline the name, principal location, and purpose of a business.

They also include the registered agent’s name and address and denote whether the LLC will be managed by members or a manager.

Once you draft your Articles of Organization document, file it with your Secretary of State’s office.

5. Obtain licenses and permits

Finally, you’ll need to file for and obtain any licenses or permits necessary for running your company. For example, a real estate agency in the state of Florida is required to obtain a Florida Real Estate Broker license before it can start doing business.

Once these are obtained, you’ll be ready to start doing business.

C corp vs. S corp vs. LLC: How to pick the right one for you

Here are the main factors to consider when deciding between a C corp, an S corp, and an LLC:

Tax implications

All three business structures come with their own separate tax implications.

C corps are taxed twice: first at the corporate level and then on the shareholders’ personal tax returns.

S corps offer pass-through taxation, with corporate income, losses, credits, and deductions passed through to shareholders and reported on their personal tax returns. They offer tax savings due to income being taxed only once.

LLCs can be taxed as a sole proprietorship (in the case of single-member LLCs) or as a partnership (in the case of multi-member LLCs). Additionally, all profits from an LLC are subject to self-employment taxes.

LLCs offer the simplest option for handling taxes. But opting for a C corp or an S corp can help you lower self-employment taxes and make it easier to reinvest profits.

Liability protection

C corps and S corps offer protection for shareholders’ personal assets. But they require strict legal compliance (such as holding annual meetings and keeping corporate minutes) for liability protection to apply.

LLCs also protect members’ personal assets. The key difference is that they don’t require the same formal requirements for liability protection.

C corps, S corps, and LLCs all help protect personal assets, but maintaining liability protection is much easier with an LLC.

Ownership structure

C corps can have an unlimited number of shareholders, while S corps are limited to a total of 100 shareholders. LLCs can have an unlimited number of members.

C corps are ideal for businesses that plan on seeking external funding or going public at some point. However, LLCs offer more ownership flexibility, making them perfect for businesses that don’t plan on relying on venture capital.

Compliance and administration

C corps and S corps require a board of directors, regular meetings, and corporate bylaws.

In comparison, LLCs are much easier to manage and have fewer reporting requirements.

Growth goals

C corps offer the most benefits if you’re looking to scale quickly or raise venture capital because they don’t have a limit on the number of shareholders and are able to issue both common and preferred stock.

They also allow you to offer stock options, which can help attract top talent.

S corps are less ideal for businesses looking to raise capital since they’re limited to 100 shareholders. Since LLCs aren’t able to issue stock, they’re not suitable for businesses looking to raise capital.

Profit distribution

C corps allow you to reinvest profits or distribute them as dividends.

In an S corp, profits get distributed based on ownership shares.

When it comes to LLCs, members decide how profits are distributed. Because of this, LLCs offer the most flexibility when it comes to profit distribution.

Get expert accounting and tax advice from Digits

When it comes to making the best decision for your business, you shouldn’t guess.

Its AI-powered bookkeeping and accounting software monitors your business’s finances while our trained CPAs make tax preparation headache-free.

Ready to get started? Call us today to see how we can help your startup grow.