Need Help Planning Your Business Structure? Matt Garrett Partners with SBDC @ UCI Beall Applied Innovation to Help!

C Corp:

Flexibility and Control: Your business is not you, you don’t have personal liability. This is a company, you will have shareholders, with no restrictions on what shareholders you can bring in. 

Taxes: With taxes, there are more challenges, federally you will have a rate of 21%, there may be additional state rates that will affect your bottom line. If you want to take more money out, you must take it out as a dividend. There are double layers of tax.  There are even more tax implications when you decide to sell the company. If you want to take money out of your company you can only take it out as a loan, as a salary (with payroll taxes), or as dividends (with additional taxes).

Liability Protection: C Corps have the protection of liability for shareholders.

Investors: With a C Corp, you can have as many partners you want, and they can be of any kind– foreign, corporate, etc.

S Corp:

Flexibility/ Control: You are only able to have 100 shareholders. The shareholders have to be individuals and citizens of the United States. 

Taxes: There is only one layer of tax, so you only pay taxes as if you were in a partnership or LLC. You can limit your salary, within reason, because you can pull out distributions without payroll tax or dividend taxes. In California, there are additional net profit taxes on S Corporations, which are around 1% of net profit.

Liability Protection: Liability wise it is the same as a C Corporation. It is important to note with both structures that if you do not keep your corporate structures up, you may open yourself up to personal liability.

Investors: Consider what kind of shareholders you want, as there are more limitations surrounding S Corp investors. They must be U.S citizens, they must be individuals, etc.

LLC:

Flexibility and Control: These are the most flexible of all the structures. You can work with multiple partners and you can get very flexible with how you get investors.

Taxes: There is a gross receipts tax on LLCs up to $12,000 regardless of your income for the year. If you are an owner and active participant in an LLC, you must pay self-employment taxes on your share of the earnings inside of an LLC. However, you can elect to be taxed like a partnership or an S corp so you can eliminate potential double taxation 

Liability Protection: In an LLC you are legally protected like a C and S Corp, so you can be separated from your business in terms of liability. However, there are some situations where you may be personally liable on debts, like deferring your payroll under the PPP.

Investors: You can have all different shareholders, they are called members. There are regular members that act as shareholders and there are managing members that have a say in what’s going on within the company. There is more flexibility with your members, you can have different classes, different types of members, etc. 

Partnership:

Flexibility and Control: This could just be two people, which is called a general partnership. Or it could be a limited partnership. A limited partnership has one general partner that is in control of the company and carries all the liability, it also has limited partners that have no liability, but also no voting rights or control in the company. A partnership can have as many limited partners as it wants.

Taxes: There is only one layer of tax, like an LLC and S Corp, so there is no threat to double taxation. 

Liability Protection: The liability for partnerships falls onto the general partner, all limited partners have no liability in their investment.

Investors: You can have any kind of investor you want, but they hold no control when it comes to decision making for your company.

Sole Proprietorship:

Flexibility/ Control: It’s all your cash, your money going in and out. This structure is completely in your control. 

Taxes: You file your business taxes on a Schedule C. There is no distinction between your business and yourself for tax purposes, which means all your income is subject to income tax.

Liability Protection: A sole proprietorship has no legal liability protections, all liability falls onto the individual.

Investors: You do not have multiple owners.

As you consider these options, try to align your vision into these structures. If you believe your startup will gain traction early on, and be bought out in a few years, a C Corp might be your best option. If you want to avoid a double layer of tax, an S Corp or LLC might be a better option. Consider these structures along with your mission and vision for your business and then begin to move forward with your organization. 

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