Whether an LLC or C corporation is the ideal legal form for your business and your requirements is something to consider when creating a new company or opening an online marketplace.
The legal, taxation, and managerial requirements of running a company vary widely depending on its legal structure and organizational structure. What you need to know is listed below.
What is an LLC?
A limited liability company (LLC) is a legal entity formed at the state level. An LLC exists separately from its owners—known as members. However, members are not personally responsible for business debts and liabilities. Instead, the LLC is responsible.
The possibilities for how to structure an LLC are almost endless, which can be a blessing and a curse. This makes interfacing with an LLC challenging, because one has to examine the operating agreement (and potentially other contracts signed between the members) to get a handle on how the company is governed.
C corporations, by comparison, are more standardized: They share commonalities like stock to represent ownership, are governance by a board of directors, have day-to-day operations handled by officers, etc.
What is a C corp?
A C Corporation refers to any corporation taxed separately from its owners. They are usually publicly traded companies owned by shareholders. Unlike S Corporations, the taxing of C Corporations occurs twice, once on the earnings and again on the salaries of the owners.
Unlike an LLC or corporation, C-corps are not a type of business entity. The C-corp is named for the subchapter of the Internal Revenue Code—subchapter “C”—under which its tax designation is described. They differ from other business structures in the way they are taxed.
LLC and C-Corp compared
When starting a business, LLCs and C corporations are two terms that are often discussed side-by-side, they actually refer to different aspects of a business.
|Formation||Articles of Organization required||Incorporation articles|
|Taxation Filing||Estimated quarterly self-employment taxation/yearly tax return||Every Qr|
|Taxation Gains||By default, an LLC is taxed like a sole proprietorship, but it may elect to be treated like a C-corp or S-corp instead.||Double taxation: Commercial income as well as personal earnings|
|Taxation Losses||Can be deducted on your personal tax forms||Cannot be deducted on your personal tax forms|
|No. of Share-holders or Members||The number of members is capped at 100 if S-corp classification is selected, but is unrestricted otherwise.||No limit|
|Kinds of Share-holders/Members||In the majority of states, all qualifying entities, including persons and businesses, are eligible.||All qualified entities, incl. individuals & corps|
|Equity Funding||It is more difficult to obtain cash and transfer membership interests.||Simpler to raise funds.|
|Stock||There can be no shares issued.||Shares of several kinds can be issued.|
|Retaining Proceeds||More intricate; distribution shares are taxable whether or not cash is given.||Dividend payments are just taxed when they are distributed.|
|Protection from Liability||Yes, since they are unique from their constituents.||Possible as they are separate from their stockholders.|
Pros and Cons
Now that you know the differences between an LLC and corporation, it’s time to see how those differences apply to your business and make a decision.
A business attorney or tax professional is the best-qualified person to go through your books and financial statements and determine what’s in your business’s best interest.
That said, here are general things to keep in mind when looking at the benefits of an LLC vs. a corporation:
|LLC Advantages||C-corp Advantages|
|Flexibility to choose how you’re taxed (you can avoid double taxation)||Easier to raise money from investors and make an IPO|
|Pay lower annual fees||Can offer stock options to incentivize employees & attract talent|
|Fewer governance requirements||Bankers, judges, and investors are more familiar with corporations|
The main disadvantages for an LLC is it is more difficult to raise money from investors. For a C-corporation, you can be hit with double taxation if dividends are distributed and the corporate governance requirements can be time-consuming and expensive.
LLC vs C-corp taxation differences
The IRS classifies businesses as either sole proprietorships, partnerships, C Corporations, or S Corporations. LLC is a legal entity, not a tax entity. Therefore, they are taxed as if they are a different type of business.
If you don’t specify when you file, the IRS will automatically tax one-member LLCs as sole proprietorships and multi-member LLCs as partnerships. You can however, choose taxation as a C Corporation or as an S Corporation.
Some LLC companies can reduce their individual employment taxes by opting for taxation as an S Corporation.
That being said, an S corporation often pays more tax than an LLC due to the extra payroll taxes and state corporate taxes that may be required. Any salary that an S Corporation pays to its owners is subject to state unemployment and disability tax. It is important to weigh up all the tax benefits and disadvantages before choosing your tax option.
Which one should I choose?
Your choice between an LLC vs. corporation comes down to your patience for paperwork and governance requirements, your tax bill, and your future goals.
For most small businesses, the simplicity and ease of an LLC works. You don’t have to worry about double taxation, and you don’t have as much paperwork to submit and government rules to follow.
However, if you think you’ll be raising venture capital in the future, then it’s a good idea to set up as a corporation now. Switching entities down the line is possible, but expensive, so it’s best to make this decision now and stick to it.
Is a C corporation or LLC the best choice for me?
LLCs are better for small, owner-managed businesses that want flexibility without a lot of corporate formality whilst C-corporations are a good choice for businesses that plan to seek outside investment.
Is a corporation or an LLC taxation more favorable?
Some LLC companies can save money on self-employment taxes by choosing taxation status as an S Corporation.
When should I choose an LLC?
It does not matter if you are a sole proprietorship, partnership, or you have more than one member, LLCs are a good choice for the small business owner. It provides limited liability protection like a corporation but without all the extra formalities.
Tom is the founder of Gottagrow.io. He reads the offers, deciphers the details including features, pricing, included services and more to find you the best products and services.