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. We’ll be focusing on C corporations (the default form of corporation) 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 structure 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.
LLCs don’t directly pay federal income taxes on profits. Profits 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 usually can’t 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” that corporations face, in which profits are taxed at both the corporate and personal levels.
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 fewer formalities and less 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; it’s easier to attract investors to a corporation than an LLC.
C corporations (C corps) provide a high level of separation between the company and its owners (shareholders), giving the owners the most personal liability protection from the a. C corps are also subject to corporate income taxes.
The business’s profits are taxed at both personal (as dividends) and corporate levels, which is called “double taxation.” And shareholders, officers, and directors usually 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:
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.
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.
Unlike LLCs, corporations are recognized outside of the U.S.
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. A corporation requires Articles of Incorporation to be submitted to the state.
Although the documents needed to start both business structures are different, the information included in each, like your company’s name, its address(es), and the owners’ names, is usually similar.
In most cases, both LLCs and C corps protect their owners. This includes protection from having their assets seized in order to pay for the liabilities and debts of the business.
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 may be a more viable option if you’re looking for a flexible structure with less paperwork. It’s important to clarify in your Operating Agreement how the LLC will operate and make changes. C corps, however, have a more rigid structure that includes appointing a board of directors and having regular meetings.
When it comes to federal income 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 levels.
LLCs are also more flexible when it comes to record-keeping and maintenance compared to C corps.
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.
An LLC is a business structure that offers protection to its owners and avoids double taxation. C corps also offer personal liability protection to their owners, but their profits are taxed at both the corporate and personal levels. C corps also have strict administration requirements like annual meetings, extensive record keeping, and electing a board of directors.
As an alternative to both reviewed forms, you may also want to consider forming an S corporation. An S corporation isn’t a business entity type, but a tax status that an LLC or C corporation can apply for if it meets certain IRS criteria.
For a corporation, one of the biggest advantages is being able to avoid double taxation. Usually, a C corporation’s profits are taxed at both the business and individual shareholder levels, while an S corporation’s profits are taxed only at the individual shareholder level.
For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the company’s profits and by being paid as an employee of the LLC. That permits them to only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to significant tax savings.
You can change from the C corp to LLC business model if you’re looking to:
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.
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 information 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.
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