Small Business Legal Tip No.1

The Sterling Minor Small Business Legal Tip No. 1

Q: What are the differences among a "C" corporation or an "S" corporation, and a limited liability company? Why would I choose one form over another?

A: The difference between "C" and "S" corporations is solely related to federal income taxes. Both are corporations and for the purposes of Texas law they are the same. The specific difference is that the "S" corporation pays no income tax itself, but rather all the taxable profit is allocated directly to the shareholders. This means that there is no "double taxation," the taxing of profit at the corporate level and that same profit as dividend income to the shareholders. Generally, a small business corporation would want to be a "S" corporation. A small business would want to be a "C" corporation if the income can be paid as salary or other reasonable compensation, and a goal is to have medical insurance and other benefits paid from pretax dollars. Those items are all fully deductible by a "C" corporation, but the benefits are not deductible in an "S" corporation structure.

A limited liability company (LLC) is a newer type of business entity, introduced in Texas in 1991. Now, all the states authorize this form of doing business. It can be set up, when there are two or more members, to be taxed by the federal government as a partnership (similar to the "S" corporation taxation), but unlike a partnership and like a corporation, the members are not personally liable for the company's debts. Therefore, the limited liability company may be the entity of choice for those businesses with two or more owners who wish to provide personal asset protection but who also want federal tax treatment as partners. Texas corporations as well as limited liability companies are required to pay the Texas franchise tax of 4.5% of income after salaries. For additional information, go to Texas Business Entities and review my memos, which are available to you for no cost from this Web site. You may easily and securely order the legal service of setting up a corporation ($99 to $350+$300 filing fee), limited liability company ($99 to $400+$200 filing fee) or partnership ($1000 to $1250+$400 to $750 filing fee), at Sterling Minor's LawWorks.

A single owner LLC is also a viable choice, as it is clear the single owner may elect to have the LLC be taxed as a proprietorship or as a corporation. Single owner LLC's are possible under the current Texas statute, and the statutes of all states except Massachusetts.

These questions and responses are Copyright © 1993-00 by Sterling A. Minor. They may have appeared previously in his monthly column "Legal Minutes" in the several Houston, Texas publications of Cruneau Media, and its successor Media ink, (West U Magazine, and others) in substantially the same form. Each response has been updated and revised as appropriate for publication on the Web in this forum.

This memorandum contains general information about the question posed and while the information presented is believed to be accurate as of July 06, 2005, the date of its latest revision, the memorandum should not be cited or relied upon as a substitute for legal advice nor as legal authority.

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