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When it comes to starting a business, all of the terms, rules, and choices can leave you feeling utterly confused.
For instance, C Corp and LLC structures seem similar enough on the surface.
However, they actually offer different benefits and drawbacks depending on business goals, financial trajectory, and more.
So, how can you make an informed decision about your business amidst all of this information?
If you’re an entrepreneur who needs to choose between establishing a C Corp or LLC, allow this article to be your guide.
I will go over the definitions of both C Corp and LLC, discuss the differences between the two structures, and provide you with tips for picking the right business structure for your organization.
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Key Takeaways
- C-corps are made up of shareholders who elect a board of directors to manage the company’s activities.
- LLCs are simple business structures that are common among small businesses for their easier tax protocol.
- Both C-corps and LLCs have risks and benefits, which may vary depending on your overall business goals.
- Choosing between an LLC and a C-corp comes down to knowing your business goals.
- Before solidifying your decision, it is always a wise decision to consult a financial or legal professional before incorporating.
C Corporation
C corporations (or C Corps) refer to a business structure that exists separately from its owner.
The ownership is divided among shareholders and these individuals elect a board of directors that manage the company.
These shareholders assume limited liability in a C-corp, which means that their personal assets cannot be affected by the financial or legal state of the company.
C-corps are required to undergo “double taxation,” which means that the company and shareholders are taxed separately.
However, C-corps are the best option for businesses that intend to expand substantially or to request funding from investors.
Limited Liability Company (LLC)
Limited liability companies (or LLCs) are another structure that is popular among small businesses.
This business structure is simpler to set up and run. LLCs also offer limited liability protections, which prevent personal assets from being affected by the business.
LLCs are subject to pass-through taxation, which means that the taxes are based on the personal income of the business owner.
This can simplify the tax requirements for a business. Moreover, the flexible management options associated with an LLC can prove to be beneficial for some business hierarchies.
What’s the difference between a C-corp and an LLC?
The difference between a C-corp and an LLC boils down to regulations and taxation.
Take a look at this table:
| C Corp | LLC |
|---|---|
| More regulatory requirements, but flexible ownership and funding options | More favorable rules and regulations, but fewer stock and investment opportunities |
| Double taxation (involving the business and shareholder dividends) | Pass-through taxation (involving personal tax return) |
Pros & Cons
Both C-corps and LLCs have risks and benefits, which may vary depending on your overall business goals.
Here is a short comparison between the two:
C Corporation
Offers stock options for employees
Limited liability protection
Tax benefits
Complexity
Maintenance expenses
Structural challenges with shareholders and board of directors
Limited Liability Company
No double taxation
Limited liability protection
No ownership rules
Taxes reported on personal return
Regulations based on the state of operation
Growth can be limited
How to choose between an LLC and a C Corp
Choosing between an LLC and a C Corp comes down to knowing your business goals.
LLCs are simpler than C-corps, yet they offer the same limited liability. C-corps are better for fast-growing companies looking for tax advantages.
The two structures have different regulatory standards and formalities, which may or may not fit in with the resources of your business.
Before solidifying your decision, it is always a wise decision to consult a financial or legal professional prior to incorporating.
You may want to discuss funding goals, long-term objectives, and tax implications with this professional.
C Corp vs. LLC: Which option is best for you?
Now you’re well-informed about two different business structures: C Corps and LLCs.
Have you considered which one you’ll choose?
Remember: there is no right or wrong choice, as long as you consider the pros and cons of your preferred business structure.
Think about your funding requirements, logistical needs, and long-term goals.
If you’re looking for some more answers, consider checking out the FAQ below.
Additionally, you may want to reach out to an accountant or attorney to discuss your options.
You’ve already proven yourself to be a thoughtful business owner by consulting this article!
FAQs
Why would you choose a C-corp over an LLC?
If you expect your company to have a substantial period of growth, choosing a C-corp may provide the funding and structure that your business requires.
Additionally, C-corps have a better reputation in the business community.
Why would an LLC file as a C-corp?
An LLC would file as a C-corp for a few different reasons, such as tax reductions, international interest, and benefits to employees (for example, healthcare).
To file as a C-corp, Form 2553 should be filed with the Internal Revenue Service (IRS).
Does a C-corp pay more taxes than an LLC?
Neither structure inherently pays more taxes. C-corps may experience double taxation but may also get tax breaks at multiple levels.
On the other hand, LLCs have pass-through taxation, which ties the losses and profits of a business to the business owner.
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