LLC vs C corp: The key differences

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.

	LLC	S-corp
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:

Advantages

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

Disadvantages

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. 

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