S CORPORATION – An S corporation is a regular corporation organized under state law that has elected to be treated as a subchapter S corporation by the IRS. Note that under state corporate law an S Corporation is no different that any other corporation. The election only means that certain operational requirements must be met to qualify for a certain tax treatment from the IRS.

Main Advantages:

• A shareholder's personal liability is limited to their contribution of capital to the S corporation, this means that a successful judgment against the business will not affect the personal assets of the shareholder in most circumstances.
• There is no double taxation applicable to S corporations. S corporations are pass-through entities as long as all IRS rules are followed. Tax is not paid by the corporate entity, but the corporation must file an informational federal return and K-1 forms must be sent to shareholders.
• Shareholders may receive a portion of their income as (a reasonable) salary. Additional income above this salary is not subject to self-employment taxes.
• Shareholders can elect to participate in the management of the business.
• Investors prefer to invest in corporations as opposed to any other business entity, particularly technology startup investors.

Main Disadvantages:

• Certain corporate formalities such as conducting organizational and annual meetings and maintaining corporate minutes must be observed. For most small businesses that incorporate these formalities are only slightly more complicated than those found in operating an LLC.
• All income must be distributed to the shareholders annually.
• An S corporation cannot have an alien as a shareholder. This means a foreign national who does not hold US citizenship or US permanent residence does not qualify, regardless of visa status (including E, L, TN & H visas).
• An S corporation cannot have a shareholder who is not an individual, in most cases.
• An S corporation cannot have more than 100 shareholders or more
• An S corporation cannot have more than 1 class of stock which makes it undesirable for angel and venture capital investors seeking preferred stock in exchange for their investment.

C CORPORATION – An C Corporation is a regular corporation formed under state law that has not elected a special tax treatment. Since the corporation has not elected a special tax treatment it is not bound by S-Corporation restrictions. This gives the corporation the greatest flexibility in terms of who the shareholders can be (a trust or another corporation can be a shareholder) and flexibility in accepting investment from a wide range of investors, including foreign nationals, who desire preferred stock in exchange for their investment.

Main Advantages:

• A shareholder's personal liability is limited to their contribution of capital to the corporation. A judgment against the business will not affect the personal assets in most circumstances.
• The cost of benefits provided to employees are deductible in most cases.
• Dividends distributed to corporate shareholders are often taxed at capital gain rates (generally, 15%)
• The ability to issue different classes of stock makes it the entity of choice for startups.
• Most investors prefer to invest in corporations. Additionally, the investor's attorneys often prefer to deal with financing transactions involving a corporation.
• Shareholders can be other business entities, trusts or foreign nationals.

Main Disadvantages:

• Certain corporate formalities such as conducting organizational and annual meetings and maintaining corporate minutes must be observed. For most small businesses that incorporate these formalities are only slightly more complicated than those found in operating an LLC.
• Double taxation may apply to C corporations unless certain tax strategies are used. Generally, the corporation is taxed on its earnings and profits as a business entity. When profits are distributed to shareholders as dividends, these dividends are taxed and must be reported on the individual's tax return.

LIMITED LIABILITY COMPANY (LLC) – An LLC is a business entity formed by one or more individuals using relatively recent provisions under state law. The owners (holders of LLC interests) of an LLC are called members rather than shareholders. LLC owners can elect to have the LLC taxed as a pass-through entity, a partnership for multiple member LLCs, a C-corporation or an S-corporation.

Main Advantages:

• A shareholder's personal liability is limited to their contribution of capital to the LLC. A judgment against the LLC will not affect the personal assets in most circumstances.
• The LLC can elect to be taxed in different ways as long as the LLC complies with the rules under which a certain tax treatment is available. Double taxation of profits can be avoided in most cases.
• LLCs are not required to have annual manager meetings and meet other formalities applicable to corporations
• LLCs are the preferred entity for landlords or real estate investors who own one or more buildings and who seek liability protection. Often, an LLC is created for each separate building. If a judgment is made against the LLC only the assets of the LLC (the building) are exposed in most cases. The owner's personal property, personal real estate or the owner's other buildings are not affected by the judgment.

Main Disadvantages:

• LLC's may be more difficult and costly to set up initially if the operating agreement has to reflect complex rights and management responsibilities distributed among more than one member.
• Most investors prefer to received preferred stock in a corporation as opposed to LLC membership units.
• In most cases an LLC should not be chosen for a technology "startup". It is likely that the LLC will have to be converted to a corporation before any angel or venture capital financings are realized, often at significant legal expense.