LLC Vs. C-corp: What are their Differences?

Napoleon

Aug 6, 2024 — 10 min read

Limited liabilities Companies and corporations are the leading corporate entities in the United States. Each business type offers more advantageous features for some companies than others.

Suppose you are a sole proprietor or partnership and wish to protect your business or personal assets, so forming an LLC or a corporation is appropriate. These two entities provide the owners with limited liability.

A corporation is also called a C-corp or C-corporation, while a limited liabilities corporation is also called an LLC. This blog navigates the differences between LLC and C-corp to help you determine which entity best suits your business needs.

What's LLC?

An LLC is a business structure incorporating some features of sole traders or partners, but it is a legal entity, like a corporation. Management and formation/tax structure are flexible, and LLCs are easy to set up and maintain overall.

The business income of an LLC is taxed collectively as 'pass-through income, ' implying that the income generated by an LLC goes through the members' income tax returns. However, LLCs can also be taxed, such as S-corps, which have passed through taxation, or C-corps, which are subject to double taxation.

Here are some LLC characteristics:

LLC is a business entity that provides founders with limited liability protection. As a business owner, your personal assets are safeguarded, and liability for business obligations and debts is transferred to your business.
LLC provides pass-through taxation, meaning founders pay personal income taxes from business income.

What's a C-corporation?

A C corporation is a company structure that ensures that the management and the business owners are separate entities or personalities or that they could be the same people. Ownership is recorded in units of shares, each of which has a specific amount of control over the business and its rights to the upside of that business. Owners are called shareholders.

Most well-known business establishments qualify as C corporations; one can hold stock in Google without being obligated to function at Google. This assumption of the possibility of the separation between control and ownership extends across the mechanics and regulations of C corporations. Delaware has a highly developed legal framework for corporate matters, making it more likely to get a predicted result in a litigation process.

Let's look into the primary characteristics of C-corp:

C corporations offer limited liability to shareholders, meaning they're not held personally responsible for the company's liabilities.
C corporations are taxed on corporate taxes based on their income generation and have separate returns with extensive requirements. The shareholders are taxed separately if the company distributes dividends or pays them a salary.

LLC vs. C-corp: Similarities

They are recognized companies in the United States, and, in most cases, third parties, including the potential business partners and government, acknowledge both. However, this may not be similar in some countries, so the local equivalents of the LLCs may be at a disadvantage compared to the C corporations.

Like any business structure, both LLCs and C corporations intend to protect business owners and managers from the legal ramifications of the company's operations and financial obligations.

Both can sign contracts, acquire other firms or be owned by them, own many properties, use banking facilities, and run ventures.

Here are more similarities:

1. Assets and IP

The LLCs are common among the founders of side projects, small teams, and those who do not know what their business will be in the future. They can also cater to the business of a more significant entity, such as Basecamp, which started as an LLC and later changed to a C corporation company.

LLCs are convenient for side projects due to their monetary flexibility and members' independence. This makes it easy to transact money and IP between the members and LLC without entailing tax burdens that will be incurred in a C corporation, and minimal formalities are required.

Although it's possible to create this flexibility within a C corporation, it usually requires more record-keeping and can create numerous possible tax complications, especially concerning IP. Decisions requiring significant expenditures in a C corporation can only be made officially by passing resolutions or holding a stockholder's vote. While an LLC, such agreements may give owners or managers more room to make decisions without following the corporate formalities.

2. Indefinite term

C-corps and LLCs can operate until they are dissolved or cease operations in the state of registration. During formation, you can set a fixed duration in many states; however, it is not mandatory.

3. S-corp

LLCs and C-corps can be taxed as S-corps if they meet specific criteria. For example, if an LLC has more than 100 US members. For a C-corp to be taxed as an S-corp, it must have 100 shareholders who are US residents and can only issue one class of stock.

Your LLC can choose the S-corp status during or after formation, but applying on the current tax year, you must elect it within 75 days of the start.

4. International ownership

While forming LLCs or C-corporations, there is no restriction on the owners' citizenship or residency in the United States or Delaware. However, nonresidents can be in rather complicated tax situations. Nonresident LLC members must pay US taxes on their earned income and face taxes in their local area.

For example, if one LLC has two members, one from the United States and the other from Japan, the Japanese member will be taxed on their LLC income twice – in the United States and Japan, making the tax returns complicated.

5. Owning employees

LLCs and C corporations may have employees. Generally, you can give an LLC employee ownership without control, but it cannot be quickly done. C-corporations already have the structures for granting equity or options to the workers; the taxes are linked to stock and prevalent corporate practices ingrained in the technology field.

Selecting equity over membership in an LLC is often the company's employees and advisors' preference. Membership in an LLC can complicate their tax returns, even if they are an outgoing member of the LLC.

LLC Vs. C-corp: Differences

Even though LLCs and C-corporations have similarities, their formation and maintenance requirements differ. Your chosen structure depends on the size and location of your business operations.

Let's see how these two business structures differ:

1. Maintenance requirements

The formation process is relatively the same for LLCs and corporations. However, the management differs considerably. C-corps requirements include appointing a board of directors, conducting shareholders' annual meetings, formulating business by-laws, and issuing share stocks to shareholders.

In contrast, LLCs do not necessitate the election of a board of directors, conducting meetings, or issuing stocks to the shareholders.

2. Taxes

From the tax aspect, LLCs are more flexible than corporations, making LLCs more advantageous. By default, an LLC type of business is a pass-through entity. This means its LLC is taxed like a sole trader if it has one member and as a partnership if it has multiple members.

Members' Contribution includes self-employment tax, which includes social security and Medicare taxes. A corporation pays for this only if it has employees. While LLCs can choose to be taxed as C-corporation or S-corporation, most corporations do not have the advantage of pass-through taxation. However, there are some situations when corporations can choose S-corp taxation if conditions have been met.

3. Ownership changes

A board of directors and officers manages corporations; their ownership lies with the stockholders. Members usually own LLCs, although they can hire managers to manage their ventures on their behalf.

Unless specific provisions are provided in the LLC's operating agreement, the business may have to close to restructure and operate if a member quits or dies. Corporations still operate since they are detached from the internal affairs of the officers and shareholders.

4. Expansion and international operations

Corporations are better placed for growth and expansion. The corporate structure is recognized in other countries, while LLCs work only in the US. Corporations can form subsidiaries and invite investors or issue stock to generate capital.

On the other hand, LLCs can't issue stocks, and most venture capitalists prefer investing in corporations to LLCs.

LLC vs. C-corp: Pros and Cons

LLC pros and cons

LLC's significant advantages and disadvantages are about taxes liability and stocks

LCC Pros	LLC cons
Through pass-through taxation, you avoid C-Corps double taxation	Can traditionally issue stock shares. Instead, profit shares are distributed among members as income.
Founders Limited liability means only company assets can be used to settle business debts.	It is more complex to obtain funds without the standard stock investments and corporations' precise, heavily standardized components.
Fewer regulations mean less paperwork and more manageable meeting business obligations at various government levels.	Retaining earnings is a more challenging task as distribution shares are subjected to tax whether there is distribution or not.
If you meet the IRS's desired criteria, you can choose corporation tax status as S-corp or C-corp.	Founders pay self-employment tax unless they choose to be taxed as a C-corp or S-corp.
The government does not restrict the management structure, and owners are free to select one of their prescribed choices. An LLC can also have sole or multiple owners.
More overall flexibility may be required for some small business owners.

C-corp pros and cons

C-corps' advantages and disadvantages still revolve around tax liability and stocks, just like in an LLC.

C-corp pros	C-corp cons
Limited liability is available for directors, shareholders, employees, and officers.	Double taxation is where earnings are subjected to taxes by first levying 21% as a corporate income tax and then again as a personal income for the shareholders' dividends and gains.
There is no limit to the number of shareholders that may participate and no restrictions concerning the nationality or corporate/entity nature of the shareholders.	There are no personal write-offs, which implies that shareholders cannot deduct business losses on individual income statements in a manner that some members of other business structures are allowed to.
It is ideal for equity financing, and investors are attracted to it due to its efficient ownership, management, and taxing mechanisms. .	Considerably more costly and time-consuming to establish and sustain as compared to other business formations
Minimum tax compared with the maximum personal and corporate tax rate for non-incorporated business entities.	Strict rules and regulations relate to aspects of the business operation, like convening meetings and preserving records.
	A more structured, formal, and bureaucratic hierarchy is more complex to operate with benefits in terms of mobilization of funds.

LLC vs. C-corp: which is which?

This is not a substitute for legal and tax advisors on your chosen business structure. However, these brief descriptions of the similarities and differences between these business structures may assist you in determining what type of business structure to choose.

	LLC	C-corporation
Formation	Articles of organization	Articles of incorporation (Corporation tax is by default charged at the C-corp tax rate)
Tax gains	Single layer or pass-through: Source of corporate taxation The default corporate income taxation type is personal income tax only. But, LLCs can choose an s-corp or c-corp taxation structure.	Double taxation, that is, personal income and corporate income
Tax losses	It can be written off on personal tax returns	It can't be written off on the personal tax return
Tax filings	Quarterly self-employment taxes or annual tax return	Quarterly
Shareholders numbers	Unlimited, except if you choose S-corp status, which restricts the number of members to one hundred.	Unlimited
Shareholders origin	Domestic or international	Domestic or international
Stocks	Cant issue stocks	Can issue several classes
Equity financing	The more significant challenge is raising capital, with the slightest ease in transferring membership interests.	Easier to raise capital
Retention of earnings	More complex, a corporation's distribution shares are taxed whether it distributes cash or not.	Simple: dividends are only subject to tax when they are paid out.
Limited liability protection	Yes, the company and owners are distinct entities	Yes, the company and owners are distinct entities

LLC vs. C-corp: Formation Cost

LLCs are initially a little cheaper than C-corporations. The articles of organization filing fee that creates the LLC tends to range from $50–$500. Compliance with LLCs is also less than that of C-corps, which lowers legal and accounting costs. However, C-corps may be more beneficial in tax shelters after specific years.

How to Form LLC

Choose a Name for Your LLC: Make sure the LLC name you choose does not already exist in another company in your state. Name registration can be done for a small fee.
Appoint a Registered Agent: appoint an agent with a physical address in your registration state. This can be an LLC member or a hired commercial agent.
File Your Articles of Organization: Endorse the documents to the state's corporate filing office with basic facts about your LLC and the filing fee.
Decide Management Structure: Decide which is better for your LLC's running – member-managed or manager-managed.
Create an Operating Agreement: It is good that we need to draft an internal document to outline particular management and operations.
Comply With Tax and Regulatory Obligations: Obtain an EIN, apply to obtain licenses, and register for related taxes.
File Your Annual Reports: Deliver all statutory annual returns and amounts to ensure the company is on the right side of the law.
Register to Do Business in Other States: Obtain your LLC legal entity formation in each state where the business intends to operate and obtain its registered local agents.

How to form a C-corp

Here are the steps of a C-corp formation.

Select a Business Name: Make sure others do not use the name you chose and also, where appropriate, use complement words such as "corporation," "incorporated," or "limited."
Select a State of Incorporation: You can select your home state if you prefer. Otherwise, you can select a more business-friendly state like Delaware, California, or Nevada.
Designate a Registered Agent: Appoint a company formation agent with a physical address within the state to serve documents to them.
File Articles of Incorporation: This document must be filled out and submitted to the state office indicating the business name, address, registered agent, and stock information, then filed accompanied by the filing fee.
Draft Corporate By-laws: Develop the internal regulations concerning the relations between the company and its shareholders, officers, and directors, as well as many operational provisions.
Appoint Directors: The incorporator appoints the first directors, who are expected to stay in office until the first annual general meeting of the shareholders.
Conduct an Organizational Meeting: The startup issues include the adoption of by-laws, the appointment of officers, and the directors' meeting minutes.
Issue Stock: issue shares to increase capital base and offer stakes to the first shareholders.
Apply for Licenses and Permits: Secure relevant local and industry licenses and permits to trade legally.
Register for State Taxes: Obtain licenses for selling sales tax if relevant to the business.
Obtain an Employer Identification Number (EIN): One should apply for a federal tax ID number from the IRS for business operations and taxation.
Open a Business Bank Account: This limits access to one's business to reduce risks and liabilities in every transaction.
Stay Compliant: Comply with states' requirements regarding records updates, annual resident meetings, and license renewal.

Form Your LLC with Foundeck Today

Foundeck offers a range of fast and efficient online company formation services, allowing you to register a business structure of your choice quickly from anywhere and keep it compliant. To get started, kindly contact us here.

Bottom Line

Choosing between an LLC and a C-corporation depends on your business needs. If you have a small business, an LLC is the ideal business structure due to its flexibility, convenience, and cost. This structure requires less paperwork. Its members enjoy flexibility in ownership, profit sharing, and management since the LLC operating agreement determines everything.

C-corps are ideal for medium and large companies wanting to go public. This structure allows unlimited shareholder numbers and distinct taxation from its members. It also allows companies to raise capital quickly through stock sales. If you have a question about choosing an LLC or a C- corporation, kindly contact one of our experts here.