LLC vs C Corp | Key Differences & Which To Choose?
If you are looking to start a new business, it is important to understand the two most common legal entities that can be formed for doing business in the United States - C corps and LLCs.
As an expert with over a decade of experience, together with my team of experts in business law, we crafted this guide aiming to demystify these entities, providing you with the insights needed to make informed decisions.
Whether you're seeking the tax advantages of an LLC or the growth potential of a C Corporation, understanding these fundamental differences is the first step toward successful business ownership.
Quick Summary
- LLCs are popular for their flexibility, pass-through taxation, and liability protection.
- C Corps are ideal for businesses planning to raise significant capital or go public.
- 70% of new businesses are LLCs, according to the National Association of Secretaries of State.
What is a C Corporation?
A C Corporation is a legal business entity owned by shareholders. It’s formed by filing paperwork with your state and offers strong liability protection. Here’s how it works:
- Ownership: Shareholders own the company by purchasing stock.
- Liability: Shareholders are not personally liable for business debts.
- Taxation: C Corps face double taxation—profits are taxed at the corporate level, and dividends are taxed again when distributed to shareholders.
C Corps are ideal for businesses with multiple investors or plans to go public. They also offer a more formal management structure, with directors and officers running the company.
The Benefits of C Corp
The benefits of C corporations include:
- Company profits are taxed only once at the corporate level; and,
- Company shareholders cannot be held personally liable for company debts.
However, corporations pay taxes on their net income after expenses and dividends are received from other companies.
We always advise our clients as corporation owners to abide by laws that apply to all U.S. businesses, including federal tax codes and employment guidelines like social security rules.
A C Corporation is a separate legal entity allowing employees to engage in contracts independently of the board, ideal for those seeking to use company profits personally or for business and for raising investor funds due to its perceived professionalism.
What Is a Limited Liability Company?
An LLC is a flexible business structure that combines the liability protection of a corporation with the tax benefits of a partnership. Here’s why LLCs are so popular:
- Liability Protection: Members (owners) are not personally liable for business debts.
- Taxation: LLCs benefit from pass-through taxation, meaning profits and losses are reported on the owners’ personal tax returns, avoiding double taxation.
- Flexibility: LLCs have fewer formalities than corporations, making them easier to manage.
LLCs are a great choice for small business owners, freelancers, and real estate investors who want liability protection without the complexity of a corporation.
The Benefits of an LLC
The benefits of LLCs are numerous.
- First, LLCs can be much more flexible regarding personal liability for business debts and liabilities, including taxes.
- Second, the owners or members of a multi-member LLC are not personally liable to creditors who have an unsatisfied claim against these businesses if they were unsuccessful in filing personal bankruptcy against their own assets as well.
Because each member has only entered into a limited personal liability with their co-owners by contract during formation, you aren't responsible for what your partner does after that point (until you agree to take on additional personal responsibility, such as signing contracts).
LLC vs. C Corp: Key Differences
| Feature | LLC | C Corp |
|---|---|---|
| Taxation | Pass-through taxation | Double taxation |
| Liability Protection | Yes | Yes |
| Ownership | Members | Shareholders |
| Management | Flexible, member-managed or manager-managed | Structured, with directors and officers |
| Investor Appeal | Limited | High (ideal for raising capital) |
Paying Taxes: LLC vs. C Corp
LLC Taxation
- LLCs are taxed as pass-through entities, meaning profits and losses are reported on the owners’ personal tax returns.
- LLCs can also choose to be taxed as a corporation if it benefits the business.
C Corp Taxation
- C Corps face double taxation: profits are taxed at the corporate level, and dividends are taxed again when distributed to shareholders.
- C Corps may qualify for additional tax deductions, making them advantageous for larger businesses.
"C-corporations may provide greater tax advantages over time. Unlike LLCs, which are pass-through entities where profits and losses are reflected on the owners' personal returns, C-corporations permit business losses to offset income earned and may qualify for additional business tax deductions."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
What Is the Difference Between C Corp and S Corp?
The difference between a C corporation and an S corporation is in how the business is taxed. For both, federal taxes are separate from personal income taxes for shareholders and employees of the company.
The key difference has to do with which type of taxation applies when there is a transfer of shares or distributions made by the corporation to its shareholder(s).
- C Corp: Subject to double taxation; ideal for businesses with multiple investors.
- S Corp: Pass-through taxation; avoids double taxation but has restrictions on ownership (e.g., limited to 100 shareholders).
According to IRS data, about 65% of corporations are structured as S corporations to avoid the double taxation typical of C corporations.
FAQs
Does an LLC Pay Corporate Tax?
No. LLCs don't pay corporate taxes unless they choose to be taxed as a C or S corporation.
Do Corps Need Separate Bank Accounts?
Yes. Regardless of whether you chose a C or S corp, you will need a separate bank account to shield personal assets from the corporation's assets.
Can a Single-Member LLC Be a C Corp?
Yes. Single-member and multi-member LLCs can be C corporations if they opt for corporate taxation.
I’ve heard that some businesses start as LLCs but eventually switch to C Corps for various reasons, especially when they plan to raise more capital. Does anyone know if that transition process is tricky or expensive?