LLC, S-corp, or C-corp? Choosing the right structure for your business

The structure you choose shapes your taxes, your personal liability and your ability to raise money. A plain-English guide.

For many small California businesses, an LLC is the simplest starting point. An S-corp is a tax status that an LLC or corporation can elect, and a C-corp is usually the better fit for companies that plan to raise money from outside investors. The right choice depends on who owns the business, how it earns money, and where you want it to go.

What is the difference between an LLC, an S-corp, and a C-corp?

These three terms are not the same kind of thing, which is why they confuse people.

An LLC (limited liability company) and a corporation are legal structures created by filing with the state. An S-corp is not a separate structure. It is a federal tax election that a qualifying LLC or corporation can make. A C-corp is a regular corporation taxed as its own entity.

How does each structure protect my personal assets?

All three are designed to separate your personal assets from the business's debts and lawsuits. Generally, if the business is sued or cannot pay a bill, your home and savings are not the first target.

That protection is not automatic forever. Mixing personal and business money, skipping required records, or not keeping the business properly funded can put it at risk. Courts can sometimes look past the entity in those situations.

How are they taxed differently?

This is where the structures really part ways.

• LLC: By default, a single-owner LLC is taxed like a sole proprietorship, and a multi-owner LLC like a partnership. Profits pass through to the owners' personal returns.
• S-corp: Profits also pass through to the owners, but owners who work in the business generally must be paid a reasonable salary. Some owners find this reduces certain payroll taxes. It also adds payroll and compliance work.
• C-corp: The corporation pays its own tax on profits. If it then pays dividends, owners are generally taxed again on those dividends.

California adds its own costs. Most LLCs and corporations generally owe an annual minimum franchise tax of $800. LLCs with higher California income also owe a separate annual LLC fee, and S-corps generally pay a state tax on net income as well. A tax professional can run the numbers for your situation, since the better choice often depends on how much the business actually earns.

Who can own an S-corp or a C-corp?

An S-corp has limits. It generally can have no more than 100 shareholders and only one class of stock. Shareholders generally must be U.S. citizens or residents, or certain trusts and estates. Other corporations and partnerships generally cannot be owners.

A C-corp has no such restrictions. That flexibility is why investors and venture funding usually point toward a C-corp. If you expect to bring in outside money or issue different classes of stock, that is worth deciding early.

What should I think about before choosing?

Consider these questions:

1. Will you be the only owner, or will partners be involved?
2. Do you plan to take on investors or sell the business someday?
3. Do you expect steady profits, or are you still testing the idea?
4. How much paperwork and compliance are you ready to handle?

If you are a solo owner or a small group starting out, an LLC often offers protection with the least paperwork. If profits grow, you can discuss an S-corp election with your tax advisor. If investors are part of the plan, a C-corp may make more sense from the start.

Can I change my structure later?

Often yes, but it is not always painless. Converting from one structure to another can raise tax questions, require new filings, and mean updating contracts, licenses, bank accounts, and leases. Getting the structure right early usually costs less than fixing it later.

Whichever structure you choose, put the ownership terms in writing. An operating agreement for an LLC, or bylaws and a shareholder agreement for a corporation, spells out who decides what and what happens if an owner leaves. Those documents often matter most when something goes wrong.

When to call a lawyer

You do not need to have everything figured out before you ask. If you are starting a business, adding a partner, or wondering whether your current structure still fits, Toros Law Firm can walk through your options with you in plain English. We serve clients across California in English, Armenian and Spanish.

The first consultation is free. You can reach the firm at (818) 641-5221, Monday through Friday, 9am to 5pm Pacific, whenever you are ready.

This article is general information about California law, not legal advice. Reading it does not create an attorney-client relationship.