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Starting a business is a huge step toward commercial success. One of the first and most important decisions you’ll have to make is choosing a structure. There are many business structures, with each having their own rules and regulations on how to operate and generate revenue.

Small business owners typically adopt the limited liability company (LLC) or corporation structure. There are two types of corporations: the S corporation and C corporation. We’ll be focusing on C corporations and LLCs. 

Both can work in your benefit, but it’s up to you to weigh the merits and setbacks that come with each structure. Let’s take a closer look at these two models to help you make a decision. 

What is an LLCs?

An LLC is a business structures that offers protection to its owners from such personal responsibilities as liabilities and/or debts. LLCs are known as “hybrid” entities since they combine the characteristics of partnerships or sole proprietorships with a corporation. 

Here is some additional info about LLCs:

  • LLCs are subject to regulation depending on the state.
  • Almost any person or entity can be recognized as a member of an LLC. Exceptions include insurance companies and banks. 
  • LLCs don’t directly pay taxes on profits. Profits and losses are instead “passed through” to the business’s members, who then report these numbers on their personal tax returns. 

What are the benefits of an LLC?

Here are a few benefits that come with forming an LLC:

It offers protections for owners

As mentioned earlier, this structure protects the owners from being held personally responsible for debts. Should the company go bankrupt or face a lawsuit, for example, any personal assets belonging to the owners and/or investors cannot be sought after. 

It avoids double taxation

All profits are passed to the owners and are taxed as personal income instead of corporate taxes. This avoids the “double taxation” of the owners and the company as a whole. Self-employment taxes can also be reduced if you operate as an LLC. 

It requires no board of directors

LLCs have no board of directors, meaning that annual meetings to choose new board members aren’t required. This also allows the LLC to be run with more freedom and flexibility. 

Ownership percentages are decided by members

Members have the freedom to decide ownership percentages. These numbers can be based on the member’s financial contributions to the company or other criteria laid out in the business’s Operating Agreement. 

It requires less formalities to operate

LLCs require less formalities and paperwork when it comes to meetings, reporting, bookkeeping, and more compared to a corporation. Keep in mind, though, that these rules vary by state. 

What is a C Corporation?

Corporations, in general, can carry on doing business free of the individuals running it. Entrepreneurs might find this business entity attractive since the potential for growth is high. Remember that, depending on the type of corporation you you go with, your taxes and liability can be affected.

C corporations (C corps) provide a high level of separation between the company and its owners. For example, the company’s income and shareholders’ income are taxed separately. C corps are also subject to corporate income taxes, but like LLCs, you can reduce the amount of your self-employment tax as a corporation. 

The business’s profits are taxed at both personal (as dividends) and corporate levels, highlighting the double taxation clause. And shareholders, officers, and directors can’t be held liable for business debts so long as the company observes all corporate formalities. 

Small businesses can benefit from the C corp business entity depending on the goals it’s trying to achieve, and it’s incredibly important to keep extensive records and comply with all applicable regulations, no matter how difficult and complicated they are. 

A couple of more things to know about C corps:

  •  They limit the liabilities of firm owners and investors. The most that these parties can lose if the company goes under is what they invested. 
  • They must hold annual meetings and have a board of directors. Shareholders vote who these directors will be. 

What are the benefits of a C Corporation?

Like LLCs, C corps have various benefits that can make this model appealing:

It offers limited personal liability 

As mentioned earlier, C corps limit personal liability for directors, employees, officers, and shareholders. This is good since the company’s legal obligations won’t become personal obligations for anyone associated with the business. 

It continues on despite leadership changes

The corporation continues to operate even if its owners leave, are removed, or change, and managers are replaced. 

It has no limit on the amount of shareholders and owners

C corps can have many shareholders and owners, but the company must register with the Securities and Exchange Commission (SEC) after it reaches a specific threshold. 

It offers shares of stock

A C corp can offer shares of stock, which can lead the company to obtain high amounts of capital. These earnings can be used to fund expansions and/or new projects. 

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How are LLCs and C Corporations similar?

LLCs and C corps are quite similar in two ways. 

Registering the business

Articles of Organization must be submitted to the state in order to form an LLC. For a C corp, you’ll need to file Articles of Incorporation with the federal government.

Although the documents needed to start both business structures are different, the information included in each, like your company’s name, it’s address(es), and the owners’ names, is similar. 

Note that because LLCs are state-level classifications, the requirements needed to draft your Articles of Organization may be different depending on your location. 

They offer liability protection

Both LLCs and C corps protect their owners. This includes protection from having their assets seized in order to pay for liabilities and debts. 

How do LLCs and C Corporations differ?

If you’re looking for the difference between an LLC and C Corp, there are a few important distinctions:

Business structure

C corps have a fixed structure comprised of directors, officers, and shareholders. An LLC’s members, on the other hand, can structure their business model however they want. LLCs can also run larger businesses and can transition into a C corp model if they outgrow their LLC status. 

LLCs are also a more viable option if you’re looking for a flexible structure for an innovative business model. It’s important to clarify in your Operating Agreement how the LLC will operate and make changes. C corps, however, have a structure that focuses more on raising money and future growth. 

Taxes and flexibility

When it comes to income taxes, LLCs are pass-through taxation business models. Income is attributed to the business’s members who pay individual income tax on their earnings. For C corps, they suffer double taxation at the personal and corporate level.

LLCs are also more flexible when it comes to record-keeping and maintenance compared to C corps. You’ll still have to follow LLC-related regulations in your state. 

Ownership structure

A corporation’s ownership depends on shares that can be purchased and sold. For an LLC, the owners are the founding members. However, an LLC’s Operating Agreement can specify how the company’s ownership will be valued and changed. 

Now that you know all you need, what do you choose?

An LLC is a business structure that offers protection to its owners and avoids double taxation. C corps, on the other hand, is any corporation that’s taxed separately from its owners. Their owners pay corporate and personal income taxes. C corps also have strict administration requirements like annual meetings, board of directors and corporate officers. 

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The S Corporation Alternative

As an alternative to both reviewed forms you may also want to consider forming an S Corporation. S Corporation as a formation type may have a number of benefits over LLCs or C Corp. Learn more here.

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FAQs

If you’re looking to start a business today but aren’t sure how to go about doing it, then we can help! Forming an LLC or filing for a corporation is easy and can be done in minutes with our services.

You can change from the C corp to LLC business model if you’re looking to:

  • Avoid double taxations that C corps are subject to.
  • Retain limited liability protection with a more flexible business model.
  • Reduce any potential future tax burdens if it looks like rates will increase.
  • Reduce the amount of paperwork that comes with C corp operations.

Yes, you can change from an LLC to a corporation through three different conversion methods: statutory conversion, non-statutory conversion, and statutory merger.

 

If you plan to conduct business internationally, then a C corp might be the better option. C corps can grow thanks in part to outside investors.

How can we help?

We offer innovative and seamless services to help you start an LLC or corporation. Which of the two models you decide to go with is entirely up to you. Consider the information above to make an informed decision, and it never hurts to seek our help or the advice of a professional. In addition to forming LLCs or corporations, we also offer a variety of other formation services and worry-free compliance.

Our Simple Five Step Formation Process

1

You select your filing package and additional business services

You choose the filing option and add-on services that fit your needs like expedited filing speed, Employer Identification Number (EIN), Registered Agent, and Worry-Free compliance.

2

We file your business documents with the State

Our team collects and files all the necessary paperwork with the State to form your business based on the plan and time-frame you select at checkout.

3

The State confirms your business

This process can take a few days or a few weeks depending on the filing speed you select and the State’s internal processes and formation backlog.

4

We deliver all business documents in your personalized dashboard

The documents include your business formation certificate and employer identification number (EIN) assuming you purchased that additional service.

5

We provide ongoing services to keep your business compliant with all state requirements

Our registered agent and worry-free compliance services ensure your company is always in good standing with the state.

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We use technology and automated processes to provide a fast and low-cost business formation service that meets your unique business needs. Our technology keeps our costs down and offers the most customized business formation experience online. The result is a fast, low-cost, personalized service for everyone in our community!

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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.