Pros and Cons of Different Entity Types: LLC, S-Corp, C-Corp
The following chart lists the principal considerations in selecting the form of business entity and applies them to the C corporation, S corporation, and limited liability company (“LLC”) entity forms.
The considerations are listed in no particular order, in part because their importance will vary with each business formation depending on the nature of the business, sources of financing and the plan for providing financial returns to the owners (e.g., distributions of operating income, a public offering or a sale of the business). Other factors that are not listed will also influence choice of entity. In addition, the “yes or no” format oversimplifies the applicability of certain attributes. Note that the chart assumes the LLC entity form is classified as a partnership for income tax purposes.
(A)S Corporation would convert to C Corporation upon a public offering because of the number of shareholders.
(B)Although an S Corporation can issue ISOs, the inability to have two classes of stock limits favorable pricing of the common stock offered to employees.
(C)Although the public markets are generally not available for partnership offerings, a partnership or LLC can be incorporated without tax and then taken public. Note, a publicly traded partnership is taxed as a corporation.
(D)Although partnership and LLC interests can be provided to employees, they are poorly understood by most employees and so typically are appropriate for and limited to a small number of the most sophisticated executives. Moreover, ISOs are not available.