Hey there, are you starting a business? Or are you looking to expand your dream venture? Whatever your situation is, congratulations!
One of the first decisions you’ll need to make is what type of business entity to form. The limited liability company (LLC) and the corporation (C corp) are two of the most popular options.
So, which one is right for you? It depends on several factors, including your business goals, ticket size, number of owners, and tax situation.
In this blog post, we’ll thoroughly compare LLCs and C corporations. We’ll cover the key differences between the two entities so you can decide which is best for your business.
Grab a steaming cup of coffee, and let’s start!
Business Legal Entity Options
A business legal structure, also called a business entity, is a government classification that governs certain aspects of your company. The legal structure of a business determines how it is owned, managed, organized, operated, and taxed. A business structure is specific guidance about how your business will be run under the law
There are four business legal entity options. They are:
- C Corp
Today, we will discuss the two most popular business structures: LLC and C Corp.
What Is an LLC in Business?
In the United States, a Limited Liability Company, or LLC, is a business structure that shields its owners from personal liability for the company’s liabilities or debts. Limited liability companies are hybrid businesses that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
LLCs are pass-through entities, meaning the company does not pay corporate income taxes. Instead, the LLC’s proceeds are collected as income by the individual owners or members, who then pay personal income taxes on the results.
The designation of a Limited Liability Company was mainly created to increase small business’s access to the protection from liability afforded to corporate shareholders.
How Do I Proceed with an LLC Application?
You’ll need to follow several steps to apply for a Limited Liability Company (LLC) in the United States. The steps are as follows:
Step 1: Choose a state where you want to form your LLC.
Step 2: Pick a name for your LLC.
Step 3: Appoint a Registered Agent.
Step 4: File the Articles of Organization with your state.
Step 5: Make an LLC Operating Agreement.
Step 6: Get an EIN from the IRS.
Step 7: Register with the state and local tax agencies.
Step 8: Comply with Additional Legal Requirements.
Once you have completed these steps, your LLC will be officially formed. You must keep your LLC in good standing by filing annual reports and paying taxes.
What Is an LLC Operating Agreement?
An LLC operating agreement is a legal document that outlines the rules and procedures for an LLC. It identifies the company, states who owns it, defines member responsibilities, and outlines other structural aspects of the business. It usually contains basic information about the LLC and its owners (members), the company’s tax treatment, and guidelines for how specific essential procedures will be handled.
Operating agreements serve as a legal contract between or among members of a multimember LLC, though they can also benefit single-member LLCs.
Although not all states require an LLC operating agreement, having one is a good idea. It can be customized to fit the LLC’s and its members’ needs.
Limited Liability Benefits
Some companies are owned by shareholders, who make investments in the company by purchasing shares. Shareholders cannot lose more money than they originally invested in the company if it fails or goes bankrupt. For example, if the company fails, they will not lose their personal assets, such as their home or car. This is known as limited liability.
Limited liability has several remarkable benefits. Some of those are given below:
- Personal asset protection: Limited liability offers personal asset protection. If the business fails, the owner’s personal assets, such as their homes and cars, are not at risk.
- Pass-through taxation: LLC profits and losses are passed on to owners’ personal tax returns. This exempts the owners from corporate taxes on business profits.
- Flexibility: Limited liability is easy to manage and tax. Owners can choose between business management and profit/loss distribution.
- Simplicity: LLCs are generally easier to form and maintain than corporations. They are also subject to fewer regulations.
Can LLCs Offer Liability Protection?
Yes, LLCs can provide liability protection to their owners. This protects the owner’s personal assets if the business is sued or goes bankrupt. However, there are exceptions. For example, if an owner commits fraud or negligence alone, they may still be held personally liable for the resulting damages.
The extent of liability protection an LLC offers varies from state to state. In some states, LLC owners are entirely immune from personal liability. In other states, there are some exceptions to the rule. You can always consult with an expert to be clear on it.
What Is a C Corporation?
A C corporation, or C-corp for short, is a type of legal structure for a corporation in which the owners or shareholders pay taxes separately from the entity.
The “C” comes from C corp. income being taxed under subchapter C of the Internal Revenue Code, or IRC. When a business is formed in the United States, it is automatically set up as a C corporation.
Large American businesses like Microsoft and Walmart are C corporations, and the US Internal Revenue Code’s Subchapter C governs how their income is taxed.
How Do I Form a C corporation?
You need to follow several steps to form a C corporation. The steps are mentioned below:
Step 1: Choose a name for your business.
Step 2: Organise leadership and appoint directors.
Step 3. File articles of incorporation.
Step 4: Draft Corporate Bylaws.
Step 5: Issue stock certificates.
Step 6: Draft a Shareholders’ Agreement.
Step 7: Apply for business licenses and identification numbers.
Following these steps, you can officially form your C corp. Then you can proceed with your company’s operations. Remember to comply with all the legal obligations to have good standing with the government.
Articles of Incorporation for C Corp
Articles of incorporation, also known as a certification of formation or a charter, are documents filed with a government body to document a corporation’s legal formation. These legal documents contain general information about the corporation, such as the company name and location.
Articles of incorporation are often confused with bylaws, which govern a corporation and define its directors and officers. The bylaws, along with the articles of incorporation, form the legal framework for the business.
Most states allow you to file articles of incorporation online. State requirements vary, but this document usually includes the following:
- The name of your corporation or business.
- Its primary place of business.
- The corporate legal structure.
- It’s objective.
- The name and address of your corporation’s registered agent, who will accept the service of legal papers on your behalf.
- Incorporators’ and/or initial board members’ names and addresses.
- The types and quantities of authorized shares available to your business.
- The duration of the business.
- Your name, signature, and address; if you are not the business’s incorporator, you will provide this information to the incorporator instead.
Once the articles are approved, you will receive a certificate of formation.
Corporate Taxation Procedure
Corporate taxation is a system of taxation that applies to corporations. Corporations are taxed on their profits, which are calculated by subtracting expenses from revenue. The government sets the corporate tax rate.
In a C corporation, the owners or shareholders pay taxes separately from the entity. As it happens, the C corporation must file personal and corporate tax returns. This means your business income is subject to double taxation, once on the corporate return and again as dividends on your personal return
Double Taxation in C Corporation
For corporate taxation, when a business makes a profit and an income, the tax is based on its total income as a business unit. After taxes are removed, the rest of the money is given to the shareholders. The shareholders are also taxed on the share profits they get on a personal level. This is how double taxation occurs for a corporation.
Similarities of LLC and C Corp
An LLC and a C corporation have some similar features. They both offer limited liability, simplicity in various rules, and taxation. A few similarities between LLCs and C corporations are given below:
Limited Liability
Both LLCs and C corporations offer limited liability protection to their owners. This means that the owner’s personal assets are not at risk if the business is sued or goes bankrupt.
Indefinite Period
Although you can designate a fixed time period for your business during formation in many states, you are not required to do so by default. C-corps and LLCs can continue to operate as long as the owners or members want them to, as long as the business remains in good standing with the state where it was formed.
Procedure for Registration
You must file articles of organization with your state government to form an LLC, and you must file articles of incorporation with the federal government to form a C corporation. Similar information, such as your company’s name, locations, and owners, is required on both forms. Because LLCs are state-level classifications, the requirements for your articles of organization will vary depending on your location.
Electing S Corp Status
If specific criteria are met, both C-corps and LLCs can elect to be taxed as S-corps. An LLC taxed as an S-corp must have no more than 100 members, all of whom must be individual US residents (not other business entities). You can choose S-corp status for your LLC at any time after formation, but you must apply within 75 days of the start of a tax year to do so.
Corporations taxed as S-corps must have no more than 100 shareholders who are individual US residents and can only issue one class of stock.
Business Entity Comparison: Differences Between LLC and C Corp
The two most common corporate entities in the United States are limited liability companies (LLCs) and C corporations. Each entity type has more beneficial characteristics for some businesses than others.
They have their own features, advantages, disadvantages, rules, regulations, and complications. Let’s explore the differences between these two business structures:
Meaning
- LLC: This hybrid business structure combines the benefits of a partnership and a corporation. After the company name, “LLC” is a common designation in this structure.
- C Corporation: A C corporation is a business entity taxed separately from its owners. This means that the corporation pays taxes on its profits, and then shareholders pay taxes on dividends they receive from the corporation. After the entity name, “Inc.” is a common designation in this structure.
Forming Eligibility
- LLC: No restrictions exist on who can form an LLC. Individuals, corporations, partnerships, and other entities can form LLCs.
- C Corporation: Only individuals can form a C corporation.
Formation Process
- LLC: Submitting articles of organization to the state can complete the relatively straightforward formation process for an LLC.
- C Corporation: The formation process for a C corporation is more complex and requires the filing of articles of incorporation with the state, as well as the creation of bylaws and the issuance of stock.
Ownership
- LLC: LLCs can have one or more owners. The owners could be individuals, corporations, or other entities.
- C Corporation: C corporations can have unlimited owners or shareholders, who must be individuals.
Ownership Status
- LLC: Owners of LLCs are called members.
- C Corporation: Owners of C corporations are called shareholders.
Management
- LLC: Generally, LLCs can be managed by the owners. But sometimes, the owners appoint a manager to manage the company.
- C Corporation: C corporations must have a board of directors responsible for overseeing the corporation’s management.
Taxation
- LLC: LLCs are pass-through entities, which means that the profits and losses of the LLC are passed through to the owners and taxed on their personal income tax returns. Besides, LLC owners decide whether to be taxed as a C-corporation or a pass-through entity.
- C Corporation: C corporations are taxed separately from their shareholders, meaning their profits are taxed at the corporate level. Then the shareholders are taxed on the dividends they receive from the corporation; thus, double taxation occurs.
Owner Meetings
- LLCs: LLCs are not obligated to hold owners’ meetings.
- C Corporation: C corporations must hold corporate and shareholder meetings.
Cost
- LLC: The cost of forming and maintaining an LLC is relatively low.
- C Corporation: Forming and maintaining a C corporation is more expensive than an LLC.
Fundraising
- LLC: It is usually challenging to find investors for an LLC. Due to the various structures, investors may need much more caution and research before investing in an LLC. Because this business structure does not issue shares of stock but instead has ownership percentages aligned with membership interests, you can raise funds by selling membership interests in the LLC to investors.
- C Corporation: A C corporation is simple for venture capitalists to invest in. Corporations can raise large amounts of capital by issuing shares of stock, which they then exchange for capital from investors.
Expansion and International Operations
- LLCs: LLCs have more restrictions on structural changes and can only operate in the United States. That’s why these business entities are unable to grow and expand.
- C Corporation: Corporations are better suited to growth and expansion. The corporate structure is recognized outside the United States and can quickly form subsidiaries.
Benefits
- LLC: LLCs offer limited liability protection to their owners, meaning that the owner’s assets are not at risk if the LLC is sued or goes bankrupt.
- C Corporations: C corporations also offer limited liability protection to their shareholders, but some exceptions exist. For example, if a shareholder personally commits fraud or negligence, they may still be personally liable for the resulting damages.
Drawbacks
- LLCs: LLCs may be more difficult to finance than C corporations because they are not as well-established.
- C Corporation: C corporations are subject to more regulations than LLCs, such as the Sarbanes-Oxley Act.
LLC vs. C Corp Comparison Chart
Take a look at the LLC vs. C-Corp comparison chart:
What to Choose?
- LLC: An LLC may be a good choice if you want a business structure offering limited liability protection and pass-through taxation. LLCs are also suitable for businesses with few owners who do not plan to raise much capital.
- C Corporation: If you are looking for a business structure that can raise large amounts of capital and has the potential for multiple classes of stock, then a C corporation may be a better choice. C-corporations are also a good choice for businesses that plan to do business internationally.
Ultimately, the best business structure for you will depend on your specific circumstances and needs. Consult an attorney or accountant for personalized advice on the best business structure. Business Globalizer can help you with customized premium business consulting specially tailored for you.
FAQs on LLC Vs. C Corp
Q1: Can I change from a C corporation to an LLC?
Answer: Yes, you can change from a C corporation to an LLC. This process is called “conversion.” But there’s a bit of complexity in that. So, consult with an attorney to know the process correctly.
Q2: Which is better for freelancers: LLC or C Corps?
Answer: LLCs and C corps can be good options for freelancers, but your best choice will depend on your specific circumstances and needs.
Q3: What business entity do investors prefer?
Answer: Investors generally prefer C corporations, as they offer several advantages.
Q4: Which is more expensive: LLC or C Corps?
Answer: Forming and maintaining a C corporation is more expensive than an LLC.
Q5: Which one offers Management Flexibility: LLC or C Corp?
Answer: Both LLCs and C corporations offer flexibility in terms of management structure. However, there are some key differences between the two.
LLCs: LLCs can be managed by the owners or a management team. The operating agreement of the LLC will specify how the business is to be managed. This gives the owners much more flexibility in how they want the business to be run.
C Corps: C corps must be managed by a board of directors and officers. The board of directors is responsible for overseeing the management of the business, and the officers are responsible for carrying out the business’s day-to-day operations. This can be more complex and time-consuming than managing an LLC.
Now, you can decide for yourself. Check out our exciting US company formation packages!
Wrapping up
In the end, whether you go for an LLC or a C Corp, remember that the choice should align with your business goals. An LLC offers flexibility and simplicity, while a C corporation provides growth potential and investment options. So, before deciding, weigh the pros and cons, consider your business’s unique needs, and pave the way for your entrepreneurial journey.
Whatever path you choose, here’s to a thriving and successful venture ahead!
