This is the second post in a series of three that address differences between C corporations, S corporations, and LLCs. The first post focused on taxation differences between the entities. This post focuses on ownership and governance structure differences.
Ownership
C Corps.
● Unlimited Stockholders. C corps may have an unlimited number of stockholders (subject to SEC reporting requirements if the number exceeds 500). The owners do not need to have a relationship with one another nor have a role in running the day-to-day operations of the company.
● Free Transfer of Ownership. Owners may transfer their ownership freely and readily (by selling their stock) without affecting the continuing existence of the business or the title to its assets. Thus, the perpetual existence of the entity is unaffected by the death or withdrawal of any one shareholder.
● Perpetual Existence. The perpetual existence of the C corp. is unaffected by the death or withdrawal of any stockholder.
● Common Documentation. Governing documents for C corps (like S Corps) are more familiar to most people in the business community than LLC operating agreements (which can be highly customized, complex, and cumbersome).
LLCs.
● Unlimited Owners. Similar to a C corp., an LLC may have an unlimited number of members.
● Foreign Owners. LLCs may also have foreign members (although upon becoming a member of an LLC, a foreign member may become subject to the U.S. tax laws and have to file a U.S. tax return filing. Additionally, an LLC will have to withhold on allocations of certain types of income to foreign members.
● Transfer Restrictions. However, ownership transferability for an LLC is not as flexible as that for a C corp. Generally, a member needs the approval of other members before selling an interest in the LLC. Also, a death, withdrawal, expulsion, or other departure of a member may constitute a termination of the LLC and a deemed liquidation for federal tax purposes.
● No Automatic Perpetual Existence. Most states require that an LLC’s operating agreement set a limit to the company’s existence (usually 30 years). Also, in the absence of a clause in the operating agreement providing for the continuance of the LLC in the event of death or withdrawal of a member, the LLC will cease to exist when such events occur.
S Corps.
● Limited Ownership. Unlike C corps. and LLCs, S corps are limited to 100 domestic stockholders. Stockholders must be individuals, with limited exceptions for certain trusts, estates, and exempt organizations. Stockholders must also be U.S. citizens or residents.
● Only One Class of Stock. S corps can have only one class of stock—common stock. (However, an S corp. may have voting and nonvoting common stock, a class of stock that may vote only on certain issues, irrevocable proxy agreements, or groups of shares that differ with respect to rights to elect members of the board of directors). See Treasury Regulation 1.1361-1.
● Common Documentation. Governing documents for S Corps (like C Corps) are more familiar to most people in the business community than LLC operating agreements (which can be highly customized, complex, and cumbersome).
● Free Transfer of Ownership. Ownership transferability is flexible and similar to that of C corps.
● Perpetual Existence. The perpetual existence of the S corp. is unaffected by the death or withdrawal of any stockholder.
Governance/Structure
C Corps.
● Corporate Structure. C corps have well-defined structural accountability, with governance responsibilities held separate and apart from the owners. Management is accountable to the board of directors and therefore has the ability to transact business without stockholder participation in each decision.
● State Formalities. C corps are required to follow formalities that state legislatures and courts have determined to be significant (e.g., meetings of boards of directors and maintenance of corporate bylaws, corporate minute books, stock ledger books, separate bank accounts, etc.).
LLCs.
● Structure Flexibility. LLCs can operate more informally then C corps (and S corps) and are either managed directly by the owners or managed by one or more owners (or an outside party) designated to fulfill such responsibility. Unlike corporations, they are not bound by corporate formalities such as holding regular ownership and management meetings. However, in contrast to corporations, they do not operate under a well-defined regime of uniformity and legal precedent.
S Corps.
● Similar to C Corps. S corps operate in a manner similar to C corps. and must therefore adhere to statutory formalities for decision making.