Choice of Entity & Tax Planning: C-corporations, S-corporations, & LLCs

When starting a business, one of the most important decisions you will make is choosing the right entity structure. The entity structure you choose will have significant implications for your taxes, legal liability, and business operations. There are several different entity types to choose from, including S-corporations, C-corporations, and LLCs. Each entity type has its own advantages and disadvantages, so it’s important to carefully consider which one is right for your business.

S-Corporation: An S-corporation is a type of corporation that provides liability protection to its shareholders while allowing for pass-through taxation. This means that the company’s profits and losses are passed through to the shareholders’ personal tax returns, and the company itself does not pay taxes. S-corporations are limited to 100 shareholders, and (with a few exceptions) all of the shareholders must be individuals who are U.S. citizens or permanent residents.  S-corporations are required to have only one class of stock. They are often favored by small business owners because they offer the benefits of liability protection and pass-through taxation without the double taxation that is associated with C-corporations.  And if the owner is also employed by the company, having an S-corporation can allow the owner to reduce payroll tax on the owner’s income.

C-Corporation: A C-corporation is a type of corporation that is taxed as a separate entity from its shareholders. This means that the company pays its own taxes on its profits, and the shareholders are also taxed on any dividends they receive. C-corporations are not limited in the number of or type of shareholders they can have, and they can offer different classes of stock.  For complicated tax reasons, they tend to be favored by tech startups which expect to generate low initial revenue but grow in value before being acquired. 

Limited Liability Company (LLC): An LLC is a type of business entity that combines the liability protection of a corporation with the tax flexibility of a partnership. Like a corporation, an LLC provides limited liability protection to its owners. Most LLCs are taxed as partnerships.  This means that the company’s profits and losses are passed through to the owners’ personal tax returns, and the company itself does not pay taxes.  While superficially similar the tax rules that apply to S-corporations, the partnership tax rules are more flexible.  LLC’s can be particularly useful as real estate holding companies.  However, S-corporations tend to be slightly more tax-efficient for an operating business.  California generally prohibits the use of LLCs in professional fields such as law, medicine, dentistry, etc.

Choosing the Right Entity for Your Business When choosing the right entity for your business, it’s important to consider a variety of factors, including liability protection, tax implications, and business goals. Here are some key factors to consider for each entity type:


  • Limited to 100 shareholders, all of the shareholders must be individuals who are U.S. citizens or permanent residents.
  • One class of stock.
  • Pass-through taxation.
  • Liability protection for shareholders.
  • No double taxation.


  • No limit on shareholders.
  • Different classes of stock.
  • Separate entity taxation.
  • Liability protection for shareholders.
  • Two-level taxation.


  • Pass-through taxation.
  • Liability protection for owners.
  • No limit on number of owners.
  • Flexible management structure.
  • Less regulation than corporations.
  • Not available for certain professional fields in California.

Comment about Liability Protection. One of the primary reasons to form a corporation or LLC is to limit your personal liability for the business’s debts and obligations. Both corporations and LLCs offer limited liability protection to their owners, which means that your personal assets are generally protected if the business is sued or goes into debt. However, it’s important to note that there are some situations where you can still be held personally liable, such as if you personally guarantee a loan or if you are personally involved in business-related wrongdoing (i.e., sexual harassment, negligent supervision, etc.).  Maintaining adequate insurance is critical to the success of every business.

Ultimately, the right entity for your business will depend on your specific circumstances and goals. Consulting with a tax professional or business attorney can be helpful in making this decision. By carefully considering your options and understanding the pros and cons of each entity type, you can choose the right structure for your business.