C-Corporation

S-Corporation

Limited Liability Company

Limited Partnership

Ownership Requirements

One or more stockholders.

No restrictions on types of owners.

One to 100 stockholders.

With certain limited exceptions, only US citizens or residents, certain trusts and exempt organizations can be stockholders.

One or more members. Two or more members required if LLC wants to be taxed as a partnership.

No restrictions on types of owners.

Two or more partners.

No restrictions on types of owners.

Equity; Capital Raising

Capital stock is held by one or more stockholders. There are two basic types of capital stock: common stock and preferred stock.

Permissible to have multiple classes and series of stock with different rights and preferences.

Distributions must be proportionate to stock ownership within each class of stock (preferential distributions permitted for one class over another).

C-corporations raise capital through the issuance of equity (stock) and the incurrence of debt.

A C-corporation is the most common entity form for a public company.

Capital stock is held by one or more stockholders. Only one type of capital stock: common stock.

Only one class of stock is permitted, but there can be differences in voting rights among shares of common stock.

Distributions must be proportionate to stock ownership.

S-corporations raise capital through the issuance of equity (stock) and the incurrence of debt.

An S-corporation must be converted to a C-corporation before an initial public offering.

Percentage of membership interests are held by one or more members.

Permissible to classify membership interests into different classes (like common and preferred stock) with different rights and preferences.

Distributions do not need to be proportionate to LLC ownership.

Distribution, liquidation and voting preferences can be specified in the LLC agreement.

LLCs raise capital through the issuance of equity (membership interests) and the incurrence of debt.

LLCs are not typically publicly traded. Often the members convert the LLC to a corporation before an initial public offering.

Two classes of partners: A general partner (generally responsible for management), and a limited partner (typically a silent investor). At least one general partner (who may or may not have made a contribution) is required to form a LP.

Distributions do not need to be proportionate to partnership ownership.

The LP agreement can specify distribution preferences.

LPs raise capital through the issuance of equity (partnership interests) and the incurrence of debt.

Because limited partners are prohibited from managing the partnership, it is often used for raising capital with silent investors.

LPs are not typically publicly traded. Often the partners convert the LP to a corporation before an initial public offering.

Taxation

C-corporations are not pass-through entities: their income is subject to tax and any “dividend” distributions of earnings and profits to shareholders that have already been taxed at the C corporation level are also taxable to the shareholders (i.e. income is effectively taxed twice).

S-corporations are pass-through entities: their income is subject to only one level of tax at the shareholder level.

Some states do not recognize S-corporations for state tax purposes and instead tax them as C-corporations.

LLCs are pass-through entities: their income is subject to only one level of tax at the member level.

Distributions to managing members may be subject to self-employment taxes (while distributions to shareholders of an S-corporation are generally not subject to such taxes).

LPs are pass-through entities: their income is subject to only one level of tax at the partner level.

Liability

Stockholder’s liability is limited to amount of capital contributed.

Stockholder’s liability is limited to amount of capital contributed.

Member’s liability is limited to amount of capital contributed.

Limited partner’s liability is limited to amount of capital contributed.

General partner has unlimited liability.

Management

A C-corporation is governed by a board of directors. The board of directors must designate officers to manage the day to day operations and may delegate certain decision making to committees. Certain major decisions need to be approved by the stockholders.

Same considerations as a C-Corporation.

Management is initially vested in the members, but members usually delegate management to a managing member, non-member manager or board of managers. The manager(s) may designate officers to manage day to day operations. Certain major decisions typically have to be approved by the members.

Management is initially vested in the general partner(s). The general partner(s) may delegate management and may (but do not need to) designate officers to manage day to day operations. Certain major decisions typically have to be approved by the limited partners. If limited partners participate in management they risk losing the benefit of limited liability.

Other Advantages/ Disadvantages

Regulators and employees are most familiar with this form.

The well-developed body of corporate case law and statutes provides greater certainty, but less flexibility. Accordingly, recordkeeping and corporate formalities are more onerous and costly.

Simplest and most flexible capital structure. Most common entity form for a public company and for venture capital investments.

S-corporations are less common than C-corporations because of the limitations regarding ownership and capital structure pointed out above.

As with C-corporations, recordkeeping is more onerous and costly.

It is easier for an S-corporation to convert to a C-corporation than it is for a LLC or LP to convert to a C-corporation.

Extraordinary flexibility with respect to distributions, allocations and governance.

They are subject to less formalities than corporations, but statutory and case law is the less developed than corporation and LP law. This provides more freedom, but less certainty.

There are more limitations on capital structure (e.g. it is more difficult to offer options to employees and consultants) and equity financings (investors are generally more comfortable with a typical corporate structure).

LPs (like LLCs) are subject to less formalities than corporations.

Since general partners have unlimited liability, in most LPs general partners are corporations or LLCs in order to shield against personal liability (which creates a complex and expensive structure).

Generally more appropriate for businesses that focus on a single or limited-term project (e.g. real estate project) or for businesses where one partner or a set of partners (general partners) do the work and the other partners (limited partners) provide the capital (e.g. hedge fund).