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. 

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. 

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

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. 

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. 

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. 

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. 

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. 

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. 

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

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. 

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

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. 

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. 

LLCs and C corps are quite similar in two ways. 

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. 

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

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

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. 

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. 

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. 

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.

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.

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.