A LLC, S Corp, or C Corp? What Every Entrepreneur Should Know

At our law firm, we assist hundreds of entrepreneurs, small business owners, and investors in forming and structuring their companies across New York and the United States. Whether you’re launching a new startup, growing a family-owned business, or raising capital for expansion, choosing the right legal structure is one of the most important early decisions you’ll make.

Three of the most common entity types—S Corporations, C Corporations, and Limited Liability Companies (LLCs)—each come with their own tax rules, management obligations, and strategic advantages. In this blog, we’ll walk you through what makes them different, their pros and cons, and how to determine which structure may be best for your business goals.

What Are the Main Types of Business Structures?

New companies in the U.S. generally choose from five types of legal structures: Sole Proprietorship, Partnership, LLC, S Corporation, or C Corporation. The choice impacts your liability, taxes, compliance obligations, and long-term growth potential.

While sole proprietorships and partnerships are simple and inexpensive to start, they do not offer liability protection. For most entrepreneurs seeking legal separation between personal and business obligations, the real decision usually comes down to LLC vs. S Corp vs. C Corp.

1. What Is a C Corporation?

A C Corporation (C Corp) is the default form of incorporated business under the Internal Revenue Code. It is a separate legal entity from its owners (called shareholders), which means it can own property, sue and be sued, and enter into contracts independently.

• Key Features:
  • Unlimited number of shareholders
  • Can issue multiple classes of stock
  • Eligible to raise capital from the public or institutional investors
  • No restrictions on foreign ownership
• Pros:
  • Limited liability: Shareholders’ personal assets are protected
  • Access to capital: Ideal for raising funds through investors or going public
  • Perpetual existence: Continues even if owners change
  • Tax-deductible benefits: Greater options for fringe benefits and deductions
• Cons
  • Double taxation: Profits are taxed at the corporate level (currently 21%), and then again when distributed as dividends to shareholders
  • More regulatory burdens: Required to follow corporate formalities like bylaws, annual meetings, and detailed record-keeping
  • Higher administrative costs: More complex setup and ongoing compliance obligations

C Corps are commonly used by tech startups, large enterprises, and businesses planning to attract outside investment or eventually go public.

2. What Is an S Corporation?

An S Corporation (S Corp) is not a type of business entity, but rather a tax classification available to corporations or LLCs that meet certain IRS requirements. S Corps are “pass-through entities,” meaning profits and losses are passed directly to shareholders’ personal tax returns.

• Key Features:
  • Up to 100 shareholders
  • Shareholders must be U.S. citizens or legal residents
  • Only one class of stock allowed
  • Cannot be owned by other corporations or partnerships
• Pros:
  • Avoids double taxation: Income is taxed once at the shareholder level
  • Lower self-employment taxes: Owners can be treated as employees, splitting salary and distributions
  • Limited liability: Just like a C Corp or LLC, shareholders’ personal assets are protected
• Cons:
  • Ownership restrictions: Cannot have more than 100 shareholders, or non-resident aliens
  • Limited flexibility with stock: Only one class of stock allowed
  • Less attractive to certain investors: Institutional investors may shy away due to restrictions

S Corps are typically favored by small-to-mid-size businesses that want liability protection and tax efficiency without the complexity of a C Corp.

3. What Is a Limited Liability Company (LLC)?

An LLC is a hybrid entity that blends features of a corporation and a partnership. It offers the limited liability of a corporation with the tax flexibility and minimal compliance requirements of a partnership.

• Key Features:
  • Owned by “members” rather than shareholders
  • Can be single-member or multi-member
  • Members can be individuals, corporations, or foreign entities
  • Default tax status is pass-through, but LLCs can elect to be taxed as an S Corp or C Corp
• Pros:
  • Flexible management structure: No need for a board of directors or officers
  • Pass-through taxation: By default, avoids double taxation
  • Minimal formalities: Less recordkeeping and fewer annual filing requirements
  • Asset protection: Members are shielded from personal liability for business debts
• Cons:
  • Self-employment tax: Profits are subject to 15.3% self-employment tax unless LLC elects S Corp status
  • Limited ability to raise capital: Cannot issue stock, which may deter investors
  • Varied state rules: LLC formation and maintenance rules vary by state

LLCs are ideal for freelancers, small business owners, real estate investors, and those who value flexibility over formal corporate structure.

LLC vs. S Corp vs. C Corp: Which One Is Best?

There is no one-size-fits-all answer. The right structure depends on your business goals, growth plans, and tax situation. Here are a few scenarios to help guide the decision:

• Choose an LLC if you:
  • Are a solo entrepreneur or run a small team
  • Want to minimize paperwork and compliance
  • Want pass-through taxation without S Corp restrictions
  • Don’t plan to raise venture capital or issue stock
• Choose an S Corp if you:
  • Want to avoid self-employment tax on full profits
  • Qualify under IRS ownership rules
  • Expect steady profits and want to take a salary + distributions
  • Want liability protection with reduced tax exposure
• Choose a C Corp if you:
  • Plan to seek outside investors or go public
  • Want to retain profits inside the company
  • Want to offer stock options or attract institutional investment
  • Need greater flexibility in ownership or classes of stock

Keep in mind that LLCs can elect to be taxed as S Corps if they meet eligibility requirements—offering the flexibility of an LLC with the tax savings of an S Corp.

Final Thoughts

Choosing the right entity structure is more than just checking a box—it can impact how much you pay in taxes, how you grow, and even your ability to attract funding. While online formation services are tempting, many business owners overlook crucial details that can lead to tax problems or liability exposure down the line.

At our law firm, we help entrepreneurs at every stage—from choosing the right business entity to preparing and filing formation documents, drafting operating agreements or bylaws, and advising on ownership structure, tax elections, and long-term strategy.

If you are starting a business or thinking of changing your structure, we invite you to schedule a consultation with our team. We will help you build a legal foundation that supports your vision and protects your future.

 Contact Person: Nick L.Torres, Esq. and Zhiqi Zheng, Esq.