If you are preparing to start a business, you have many decisions to make. One of them is whether to structure your business as a C Corporation or as a limited liability company (LLC).
Both business entities shield their owners from personal liability for the business’s debts and other legal obligations. However, there are distinct differences in how they are formed and in their governance requirements and taxes.
Your choice between an LLC and a C Corporation will affect how much time you spend forming and maintaining your new business entity. This article will help you decide which structure is best for you.
Characteristics of a C Corporation and LLC
A C corporation is a U.S. business structure in which the shareholders or owners are taxed separately from the business entity. An S corporation is a similar structure; both get their names from the
IRS that refers to them. The main characteristics of a C Corporation are:
- limited liability
- shareholder ownership
- double taxation
- professional management
An LLC is a U.S. business structure in which the owners are not liable on a personal basis for the company's debts or liabilities. The structure can combine the advantages of the pass-through taxation of a sole proprietorship or a partnership with the limited liability of a corporation. The main characteristics of an LLC are:
- limited liability
- separate legal entity
- taxation flexibility
- flexible management
Similarities and Differences between LLC and C Corporation
As you can see from the above list, the main similarity between the two structures is that they both offer the advantage of limited liability for owners. Let’s look more closely at their differences.
LLC Pros and Cons
We’ll begin with the advantages and disadvantages of an LLC, examining five characteristics of this business structure.
Single Level Tax
LLCs are known as “pass-through entities.” This term means that LLC income is subject to one level of tax -- at the member level. In contrast, the income of a C corporation’s income can be taxed twice -- corporate tax in addition to personal income tax on dividends.
Sale of Assets
If you sell an LLC, your buyers have a tax advantage over the purchase of a C corporation. Acquisitions of C corporations can trigger a second layer of tax.
Pass-Through of Losses
Losses, credits, and deductions pass through to the members of an LLC, possibly offsetting other income on their individual tax returns. The losses of a C corporation do not “pass through” to shareholders.
Tax Free Distribution of Appreciated Property /Tax Free Formation
An LLC can distribute its appreciated property to its members without gain any recognition to the LLC (or its members). On the other hand, a C corporation’s distribution of its appreciated property to its shareholders is subject to tax at the corporate level and sometimes the shareholder level.
C Corporation Paperwork
There is quite a bit of paperwork involved in setting up a C Corporation. Be sure to check the rules and regulations for the state in which your small business is located. Here are the basic steps:
- create an operating agreement
- create corporate bylaws
- elect a board of directors
- hold regular board meetings
- hold regular shareholder meetings
- document meetings with minutes
- issue stock certificates
- record stock transfers
- provide regular reports to shareholders
While all this paperwork sounds complicated, there is some good news. You can visit LawDistrict.com to find a template for a C Corporation operating agreement. You’ll be on your way to forming your C Corporation in no time.
Get Your LLC Operating Agreement
C Corporation Pros and Cons
Now we will examine some of the C Corporation’s advantages and disadvantages.
Self-employment Taxes
The shareholders of a C corporation do not have to pay self-employment taxes on the corporation’s income. In contrast, LLC members typically must pay self-employment tax on their distributive share of what is considered ordinary trade and business income.
Small Business Stock
A C corporation can issue qualified small business stock, thereby gaining considerable tax benefits. Qualified small business stock (or QSBS) is the term that refers to the shares of a qualified small business as they are defined by the Internal Revenue Code. A qualified small business is a C corporation with gross assets that were not over $50 million either on and immediately after its stock issuance.
An LLC is not able to issue qualified small business stock.
Venture Capital can be made
Venture capitalists and angel investors tend to prefer C corporations over LLCs for their investments. Because of the inherent flexibility in LLCs, investors must LLC carefully review them before making any investment. Foreign investors in LLCs may have to file U.S. tax returns. They do not have this complication with C corporations.
Taxation
Under IRS Section 368, C corporations can participate in tax-free reorganizations. This advantage means that an acquisition of your C corporation business for stock of the acquirer can be tax-free. IRS Section 368 does not apply to LLCs.
LLC Paperwork
Setting up an LLC is much less complicated than setting up a C corporation. Your first step is to check for the legality of LLCs in your state. Here are the essential documents you need to form an LLC:
- Articles of Organization (also called Certificate of Organization). This document should include your business name, purpose, place of business, registered agent, management structure, and how long your LLC will operate.
- Operating Agreement. This document will vary according to your type of business, but it needs to specify the rights and duties of its members and state the distribution of income to members. It also should include percentages of ownership, distribution of profits and losses, voting rights, chain of command, and how the LLC can be dissolved.
Once again, you can visit Lawdistrict.com to find a template for an LLC operating agreement. Our site has many other helpful legal documents and contracts you will need to create your business plan, set up your bylaws, and manage your new small business.
Helpful Resources:
Business structure - SBA
Forming a corporation - IRS
Corporate Reorganization Definitions - IRS
If you are preparing to start a business, you have many decisions to make. One of them is whether to structure your business as a C Corporation or as a limited liability company (LLC).
Both business entities shield their owners from personal liability for the business’s debts and other legal obligations. However, there are distinct differences in how they are formed and in their governance requirements and taxes.
Your choice between an LLC and a C Corporation will affect how much time you spend forming and maintaining your new business entity. This article will help you decide which structure is best for you.
Characteristics of a C Corporation and LLC
A C corporation is a U.S. business structure in which the shareholders or owners are taxed separately from the business entity. An S corporation is a similar structure; both get their names from the
IRS that refers to them. The main characteristics of a C Corporation are:
- limited liability
- shareholder ownership
- double taxation
- professional management
An LLC is a U.S. business structure in which the owners are not liable on a personal basis for the company's debts or liabilities. The structure can combine the advantages of the pass-through taxation of a sole proprietorship or a partnership with the limited liability of a corporation. The main characteristics of an LLC are:
- limited liability
- separate legal entity
- taxation flexibility
- flexible management
Similarities and Differences between LLC and C Corporation
As you can see from the above list, the main similarity between the two structures is that they both offer the advantage of limited liability for owners. Let’s look more closely at their differences.
LLC Pros and Cons
We’ll begin with the advantages and disadvantages of an LLC, examining five characteristics of this business structure.
Single Level Tax
LLCs are known as “pass-through entities.” This term means that LLC income is subject to one level of tax -- at the member level. In contrast, the income of a C corporation’s income can be taxed twice -- corporate tax in addition to personal income tax on dividends.
Sale of Assets
If you sell an LLC, your buyers have a tax advantage over the purchase of a C corporation. Acquisitions of C corporations can trigger a second layer of tax.
Pass-Through of Losses
Losses, credits, and deductions pass through to the members of an LLC, possibly offsetting other income on their individual tax returns. The losses of a C corporation do not “pass through” to shareholders.
Tax Free Distribution of Appreciated Property /Tax Free Formation
An LLC can distribute its appreciated property to its members without gain any recognition to the LLC (or its members). On the other hand, a C corporation’s distribution of its appreciated property to its shareholders is subject to tax at the corporate level and sometimes the shareholder level.
C Corporation Paperwork
There is quite a bit of paperwork involved in setting up a C Corporation. Be sure to check the rules and regulations for the state in which your small business is located. Here are the basic steps:
- create an operating agreement
- create corporate bylaws
- elect a board of directors
- hold regular board meetings
- hold regular shareholder meetings
- document meetings with minutes
- issue stock certificates
- record stock transfers
- provide regular reports to shareholders
While all this paperwork sounds complicated, there is some good news. You can visit LawDistrict.com to find a template for a C Corporation operating agreement. You’ll be on your way to forming your C Corporation in no time.
Get Your LLC Operating Agreement
C Corporation Pros and Cons
Now we will examine some of the C Corporation’s advantages and disadvantages.
Self-employment Taxes
The shareholders of a C corporation do not have to pay self-employment taxes on the corporation’s income. In contrast, LLC members typically must pay self-employment tax on their distributive share of what is considered ordinary trade and business income.
Small Business Stock
A C corporation can issue qualified small business stock, thereby gaining considerable tax benefits. Qualified small business stock (or QSBS) is the term that refers to the shares of a qualified small business as they are defined by the Internal Revenue Code. A qualified small business is a C corporation with gross assets that were not over $50 million either on and immediately after its stock issuance.
An LLC is not able to issue qualified small business stock.
Venture Capital can be made
Venture capitalists and angel investors tend to prefer C corporations over LLCs for their investments. Because of the inherent flexibility in LLCs, investors must LLC carefully review them before making any investment. Foreign investors in LLCs may have to file U.S. tax returns. They do not have this complication with C corporations.
Taxation
Under IRS Section 368, C corporations can participate in tax-free reorganizations. This advantage means that an acquisition of your C corporation business for stock of the acquirer can be tax-free. IRS Section 368 does not apply to LLCs.
LLC Paperwork
Setting up an LLC is much less complicated than setting up a C corporation. Your first step is to check for the legality of LLCs in your state. Here are the essential documents you need to form an LLC:
- Articles of Organization (also called Certificate of Organization). This document should include your business name, purpose, place of business, registered agent, management structure, and how long your LLC will operate.
- Operating Agreement. This document will vary according to your type of business, but it needs to specify the rights and duties of its members and state the distribution of income to members. It also should include percentages of ownership, distribution of profits and losses, voting rights, chain of command, and how the LLC can be dissolved.
Once again, you can visit Lawdistrict.com to find a template for an LLC operating agreement. Our site has many other helpful legal documents and contracts you will need to create your business plan, set up your bylaws, and manage your new small business.
Helpful Resources:
Business structure - SBA
Forming a corporation - IRS
Corporate Reorganization Definitions - IRS
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