LLC vs. C Corp

Learn more about LLCs and C Corps, including the pros and cons of each.

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Starting a business is a huge step toward commercial success. One of the first and most important decisions you’ll have to make is choosing a structure. There are many business structures, with each having their own rules and regulations on how to operate and generate revenue.

Small business owners typically adopt the limited liability company (LLC) or corporation structure. There are two types of corporations: the S corporation and C corporation. We’ll be focusing on C corporations and LLCs. 

Both can work in your benefit, but it’s up to you to weigh the merits and setbacks that come with each structure. Let’s take a closer look at these two models to help you make a decision. 

What is an LLC?

An LLC is a business structures that offers protection to its owners from such personal responsibilities as liabilities and/or debts. LLCs are known as “hybrid” entities since they combine the characteristics of partnerships or sole proprietorships with a corporation. 

Here is some additional info about LLCs:

Benefits of an LLC

Here are a few benefits that come with forming an LLC:

It offers protections for owners

As mentioned earlier, this structure protects the owners from being held personally responsible for debts. Should the company go bankrupt or face a lawsuit, for example, any personal assets belonging to the owners and/or investors cannot be sought after. 

It avoids double taxation

All profits are passed to the owners and are taxed as personal income instead of corporate taxes. This avoids the “double taxation” of the owners and the company as a whole. Self-employment taxes can also be reduced if you operate as an LLC. 

It requires no board of directors

LLCs have no board of directors, meaning that annual meetings to choose new board members aren’t required. This also allows the LLC to be run with more freedom and flexibility. 

Ownership percentages are decided by members

Members have the freedom to decide ownership percentages. These numbers can be based on the member’s financial contributions to the company or other criteria laid out in the business’s Operating Agreement. 

It requires less formalities to operate

LLCs require less formalities and paperwork when it comes to meetings, reporting, bookkeeping, and more compared to a corporation. Keep in mind, though, that these rules vary by state. 

What is a C Corporation?

Corporations, in general, can carry on doing business free of the individuals running it. Entrepreneurs might find this business entity attractive since the potential for growth is high. Remember that, depending on the type of corporation you you go with, your taxes and liability can be affected.

C corporations (C corps) provide a high level of separation between the company and its owners. For example, the company’s income and shareholders’ income are taxed separately. C corps are also subject to corporate income taxes, but like LLCs, you can reduce the amount of your self-employment tax as a corporation. 

The business’s profits are taxed at both personal (as dividends) and corporate levels, highlighting the double taxation clause. And shareholders, officers, and directors can’t be held liable for business debts so long as the company observes all corporate formalities. 

Small businesses can benefit from the C corp business entity depending on the goals it’s trying to achieve, and it’s incredibly important to keep extensive records and comply with all applicable regulations, no matter how difficult and complicated they are. 

A couple of more things to know about C corps:

Benefits of a C Corporation

Like LLCs, C corps have various benefits that can make this model appealing:

It offers limited personal liability 

As mentioned earlier, C corps limit personal liability for directors, employees, officers, and shareholders. This is good since the company’s legal obligations won’t become personal obligations for anyone associated with the business. 

It continues on despite leadership changes

The corporation continues to operate even if its owners leave, are removed, or change, and managers are replaced. 

It has no limit on the amount of shareholders and owners

C corps can have many shareholders and owners, but the company must register with the Securities and Exchange Commission (SEC) after it reaches a specific threshold. 

It offers shares of stock

A C corp can offer shares of stock, which can lead the company to obtain high amounts of capital. These earnings can be used to fund expansions and/or new projects. 

LLC vs. C Corporation: How They’re Similar

LLCs and C corps are quite similar in two ways. 

Registering the business

Articles of Organization must be submitted to the state in order to form an LLC. For a C corp, you’ll need to file Articles of Incorporation with the federal government.

Although the documents needed to start both business structures are different, the information included in each, like your company’s name, it’s address(es), and the owners’ names, is similar. 

Note that because LLCs are state-level classifications, the requirements needed to draft your Articles of Organization may be different depending on your location. 

They offer liability protection

Both LLCs and C corps protect their owners. This includes protection from having their assets seized in order to pay for liabilities and debts. 

LLC vs. C Corporation: How They’re Different

If you’re looking for the difference between an LLC and C Corp, there are a few important distinctions:

Business structure

C corps have a fixed structure comprised of directors, officers, and shareholders. An LLC’s members, on the other hand, can structure their business model however they want. LLCs can also run larger businesses and can transition into a C corp model if they outgrow their LLC status. 

LLCs are also a more viable option if you’re looking for a flexible structure for an innovative business model. It’s important to clarify in your Operating Agreement how the LLC will operate and make changes. C corps, however, have a structure that focuses more on raising money and future growth. 

Taxes and flexibility 

When it comes to income taxes, LLCs are pass-through taxation business models. Income is attributed to the business’s members who pay individual income tax on their earnings. For C corps, they suffer double taxation at the personal and corporate level.

LLCs are also more flexible when it comes to record-keeping and maintenance compared to C corps. You’ll still have to follow LLC-related regulations in your state. 

Ownership structure 

A corporation’s ownership depends on shares that can be purchased and sold. For an LLC, the owners are the founding members. However, an LLC’s Operating Agreement can specify how the company’s ownership will be valued and changed. 

Form your LLC or C Corp now

If you’re looking to start a business today but aren’t sure how to go about doing it, then we can help! Forming an LLC or filing for a corporation is easy and can be done in minutes with our services.

Summary

An LLC is a business structure that offers protection to its owners and avoids double taxation. C corps, on the other hand, is any corporation that’s taxed separately from its owners. Their owners pay corporate and personal income taxes. C corps also have strict administration requirements like annual meetings, board of directors and corporate officers. 

How We Can Help

We offer innovative and seamless services to help you start an LLC or corporation. Which of the two models you decide to go with is entirely up to you. Consider the information above to make an informed decision, and it never hurts to seek our help or the advice of a professional. In addition to forming LLCs or corporations, we also offer a variety of other formation services and worry-free compliance.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

LLC vs. C Corp FAQs

  • When should I change from a C corp to an LLC?

    You can change from the C corp to LLC business model if you’re looking to:

    • Avoid double taxations that C corps are subject to.
    • Retain limited liability protection with a more flexible business model.
    • Reduce any potential future tax burdens if it looks like rates will increase.
    • Reduce the amount of paperwork that comes with C corp operations.
  • Can I change from an LLC to a Corporation? 

    Yes, you can change from an LLC to a corporation through three different conversion methods: statutory conversion, non-statutory conversion, and statutory merger.

  • For foreign ownership, should I consider an LLC or a corporation? 

    If you plan to conduct business internationally, then a C corp might be the better option. C corps can grow thanks in part to outside investors.