You’ve finally decided to start your own business. However, you are confused and wondering if to form an LLC, or a C Corp. This can be a confusing decision for many entrepreneurs, especially if it's their first time starting a business.
LLC vs. C Corp; I will break down these two entities and discuss their differences so you can choose the best for your business.
What is an LLC?
You might have seen the letters LLC after a business name and wondered what those letters stood for. An LLC stands for Limited Liability Company. This is a business entity that has rights and liabilities separate from those of its owners.
The owners of an LLC are called Members
The owners of an LLC are called members. Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations, or other LLCs.
Most states do not restrict ownership, so members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members. Most states also permit "single-member" LLCs, those having only one owner.
Limited Liability Protection
The biggest advantage of forming an LLC is that members of the LLC have protection from debts and liabilities of the business. This means their personal assets like homes, cars, and retirement accounts are protected from creditors, lawsuits, and judgments against the business. This is one of the main reasons people choose to form an LLC instead of a sole proprietorship or business partnership.
Tax Benefits
LLCs also provide tax benefits to business owners. The IRS treats all LLCs as pass-through entities, which means the business itself does not pay income taxes. Instead, the profits or losses of an LLC are "passed through" to its members, who report them on their personal income tax returns. In contrast, shareholders of a C corporation must pay taxes twice - once at the corporate level and again at the individual level.
What is a C Corp?
A C Corp stands for C corporation. A C corporation is a legal entity and business that's separate from its owners. You form a C corp by filing Articles of Incorporation with your state government. This creates a business that can own assets, enter into contracts, and sue or be sued in its own name.
Personal Assets Protection
The main advantage of a C corporation is that it offers personal liability protection for its business owners or shareholders. Its major disadvantage is that profits are taxed twice, once at the corporate level, then again at the personal level when dividends are distributed to shareholders.
Have Shareholders
The owners of a C corporation are its shareholders. Shareholders own the business and make major decisions about it. They elect board members to oversee the management of the company, appoint other officers and hire employees.
Need to Adopt Bylaws
The S corp is required by law to create bylaws that will spell out how the company will be run and how shareholders, directors, and officers interact with each other. These bylaws can be formal or informal as you want them to be, but they're an important part of your corporate records.
Another advantage of C corporations is that they can issue multiple classes of stock which gives this type of business more flexibility when raising capital or rewarding employees.
LLC vs. C Corp: Everything You Need to Know
LLC and C Corp are two of the most common business types. While both offer owners limited liability protection, they differ in many other ways, which I will discuss here.
Taxation
Unlike corporations, states do not impose double taxation on LLCs. Instead, members of an LLC pay income tax based on the number of profits or losses they receive from the business.
This type of taxation is known as "pass-through taxation" because profits are passed through the company directly to its members when they file their individual returns.
C corporation Taxation
C corporations are the only business entities where taxes are paid at two levels; the corporate level and the shareholder level, and this is referred to as double taxation. Double taxation arises when income is taxed first at the entity level and again at the owner level when distributed as a dividend.
The double taxation of C corporations is often cited as a reason not to form a C corporation.
Annual Meetings
Unlike corporations, LLCs are not required to hold annual meetings and do not require corporate minutes for the daily operation of the business. The members of an LLC create operating agreements, which outline how the company is to be run, how profits are to be distributed, and other aspects of the business.
In addition to the standard requirements of a corporation, C Corporations are required to hold annual meetings, take minutes and keep a record of operating decisions.
Also, C corporations are required to keep their books and records up-to-date. That includes keeping track of who owns what stock and other issues related to running the company.
Ownership Structure
Unlike corporations, which have shareholders who need to appoint directors and officers, LLCs have members. These members can be individuals or other companies. There are no special rules or complicated procedures for appointing members in an LLC.
Limited Liability Companies Members
The owners of an LLC are referred to as members. Depending on the state, the members of an LLC can have 1 member, two or more members, foreign entities, corporations, or other LLCs.
There is no restriction on who to form an LLC, plus there is no maximum number of members.
C Corp Ownership
C corp ownership consists of shareholders who put money into the company in exchange for stock.
Shareholders elect board members to oversee management and appoint officers such as a president or CEO to run day-to-day operations.
Shareholders do not actively manage the company unless they have also been elected to serve on the board.
Management
An LLC can have one or more managers who manage the business on behalf of the members; a C corp is managed by a board of directors who hire officers to run the business.
Members of an LLC have the right to participate in the management of the company. All members have equal rights in deciding how the business will be run and may make decisions on behalf of the company unless otherwise provided in the operating agreement.
Less Formal than Corporations
A limited liability company is one of the simplest and most popular structures for small businesses. LLCs are easy to form and have minimal ongoing requirements.
A C corporation is a more complex business structure that offers more perks than an LLC but also has more startup costs and ongoing legal requirements.
Keep Written Records
Corporations are required by law to keep written records of meetings and resolutions. In contrast, an LLC generally does not have these same requirements.
However, if the members wish to hold meetings or maintain minutes for the benefit of all members, this can be done at the discretion of the members.
Which is better, LLC or C Corp?
Both LLC and C Corp both have pros and cons. Your business needs will dictate which business entity is good for you.
LLCs
LLCs have fewer requirements when it comes to formalities, and it makes them ideal for small business owners. There is no requirement for board meetings or minutes, and LLC members are allowed to make decisions without having a board meeting or a vote. This makes running an LLC much easier than running a corporation.
C Corporations
You may want to consider forming a C corporation if you plan on seeking outside investment from venture capitalists or angel investors. You can sell stock in your business to raise funds, which makes it easier to grow C Corp quickly because banks tend to be more willing to lend money when they see that you have private equity backing you up.
A C corporation is also appropriate if you plan to go public or want to sell your business one day.
Which is better?
This depends on what your specific needs are for your business. If you need to raise capital, want some additional protection from personal liability, and don't mind paying tax twice (once at the corporate level and then again at the individual level), you should consider forming a c corporation.
If you want to start a business and get it up and running quickly with just several members and minimal paperwork, then an LLC may be your best choice. Just be sure to consult with an accountant or attorney before forming a new business entity, so you're sure to choose the right type.
Which is Better for Taxes, LLC or C Corp?
LLCs have pass-through taxation, which means the profits and losses of the LLC are passed straight through to each member, who then reports it on their personal income tax returns. This is a big benefit for owners of LLCs because they only have to file taxes once.
When it comes to paying taxes, it’s better to choose an LLC since you only file tax once.
C Corp is subject to double taxation; it pays business income taxes on any profits it makes, and shareholders pay taxes on dividends received from the corporation. This double taxation or corporate taxes makes the C corporation a less attractive business structure than the limited liability company (LLC) and C corporation, which are not subject to double taxation.
If there are still some uncertainties left, we recommend seeking advice from some of the best formation services and registered agent services out there. Here are some of the most reliable:
Trusted Business Formation Services
Swyft Filings
Despite only doing business since 2015, their 100% positive reviews are speaking for themselves. Swyft Filings offers one of the best refund policies in the industry. On a bonus side the company also has no processing or cancellation fee for your refund. It is a great company to consider when looking to designate a registered agent service for your business.
BizFilings
BizFilings takes you through the whole process from quality check to post-incorporation and also offers on-going support. You can choose various payment plans based on the features you want and your budget. The features in the higher-end packages are also available in the lower-end packages but at an additional fee. With an A+ rating with the BBB, BizFilings is a trusted online formation service.
SunDoc Filings
When compared to other formation services, SunDoc Filings provides volume discounts for multiple states and entities and equally amazing customer support. However, if you want a service that will save you money, you may find other services in the market that cost less. Also, you may not choose SunDoc Filings if you are looking for a service with payment packages with tons of features and free registered agent service.
Inc Authority
This is one of the most reputable companies you can pick as your registered agent service. Inc Authority has enough experience in the field, having been founded in the 1980s. Its free payment package stands out in what they offer. Loads of positive customer reviews speek for themselves how satisfied and happy with their services and their LLC formation speed their clients are.
My Corporation
MyCorporation is known for offering a fast LLC formation process. If you wish to speed up the process turnaround time, you can use their expedited service, reducing the process from weeks to a few days, thoug for a fee. Nonetheless, MyCorporation is an excellent pick as your registered agent. It offers numerous payment packages with various features depending on your budget.