LLC vs C Corp | Key Differences & Which To Choose?

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: March 25, 2024
FACT CHECKED by Lou Viveros, Growth & Transition Advisor
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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

  • To choose between an LLC and a C Corporation, consider their distinct impacts on taxation, liability, and investment opportunities.
  • The choice between LLCs and C Corporations significantly affects small business tax liabilities and investment potential.
  • According to the National Association of Secretaries of State, around 70% of newly formed businesses are LLCs, highlighting their favored status for liability protection.
  • I always emphasize that corporations are appropriate for companies with many investors seeking high control over company.


What is a C Corporation?

A woman organizing documents

A C corporation represents a business entity formed by filing all the required paperwork with your state.

The business can be owned by corporation shareholders, which are people who have bought shares in the business.

Based on our informed experience, a shareholder's liability for business debts and other financial obligations ends when they sell their stock or lose their position as a company officer.

This business entity is taxed on business profits, which are then distributed to shareholders as dividends.

These earnings are subject to double taxation because the corporation itself must pay taxes before distributing dividends.

Corporations work by creating a management structure that includes officers and directors, who are usually business employees.

If the corporate structure fails, shareholders are protected from liabilities because they do not have management positions in the corporation.

This business type is appropriate for companies with many investors seeking high control over company activities and management.

The Benefits of C Corp

A man saving money as a benefit 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?

Holding hundred dollar bills while hands are tied

Limited liability companies, or LLCs, are pass-through entities that provide limited liability protection [1]. According to the National Association of Secretaries of State, approximately 70% of new businesses formed are LLCs, reflecting their popularity due to this protection feature.

This means that members of a limited liability company aren't personally liable for the company's debts and obligations.

So if you were sued because your business failed to pay back a loan from a bank, creditors couldn't come after your personal assets such as a house or car.

LLC members are individuals or corporations that own an interest in the business and share profits. Their assets are protected, just like with a corporation.

LLCs benefit from pass-through taxation, simplifying tax reporting by integrating business income directly into owners' personal tax returns, as if they personally earned the income, avoiding the double taxation common in C corporations.

Based on our experience, this structure means LLC owners aren't taxed on company profits separately; instead, profits and losses are directly reported on their personal tax returns, aligning their business financial outcomes with personal tax obligations, similar to sole proprietorships and partnerships.

The Benefits of an LLC

TAX letters surrounded by coins

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).

From our experience running multiple LLCs, since its inception, this type of legal structure has often been used by small business owners and real estate investors looking to protect themselves from their rental properties and personal property lawsuits.

Paying Taxes: LLC vs. C Corp

Computing tax expenses or costs

Limited Liability Company (LLC)

An LLC is taxed differently from a corporation.

From our experience, instead of filing taxes at both state and federal levels as corporations do, it files only one tax return each year at its own specific income bracket based on how much money was made during the said period taxable year.

LLCs don't pay taxes on their earnings; instead, they pass income or losses through to individual members who report them on their personal tax returns.

A limited liability company is a disregarded entity, which means that it has no separate corporate existence from its members.

An LLC may elect to be taxed as a corporation, meaning the income is taxed twice at the corporate level and again when shareholders receive dividends (or upon sale of their stock).

C-Corp

C corporations are responsible for filing their own tax returns with state and federal agencies; they also file an informational return under subchapter S if they meet certain criteria.

While some states have corporate taxes on sales or incomes, most do not require them unless they have offices within those respective jurisdictions.

C corporations must pay corporate income tax before passing earnings through to individuals who then report taxable amounts on personal returns.

Each member's proportionate share of profit distributions determines whether any resulting tax liability falls on the corporate entity or its members.

Members of an LLC pay taxes through their individual returns concerning allocations from their company's profit and losses - not just for wages they receive as compensation for services performed.

Pass-through LLCs avoid double taxation, usually following partnership taxation rules unless altered by an operating agreement, offering liability protection for members' assets against creditors.

Members of such LLCs are exempt from self-employment taxes, instead making estimated tax payments and filing annual informational returns.

In contrast, C corporations are not subject to self-employment taxes, with the company covering the employer's share while being taxed on profits and employee salaries.

"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?

A person in business attire pointing at a document

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.

According to IRS data, about 65% of corporations are structured as S corporations to avoid the double taxation typical of C corporations.

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).

The C Corp

When it comes time for your business to distribute profits (dividends) after you've met all expenses, paid yourself salary/wages, covered other corporate costs like insurance premiums, etc., you will be required to pay corporate tax on any money remaining before paying dividends.

After deductions and exemptions, this could mean double taxation - once at the corporate level and again at an individual level.

The S Corp

An S corporation pays taxes at the shareholder level. When your business pays you a salary for services performed, it is taxed at normal rates - the same as an individual in this case since S corporations are pass-through entities (unlike C corporations).

We advised many of our clients to choose to form their LLCs as S corporations because of the tax benefits.

Still, there are also distinct differences in how state laws treat each with regard to taxes, liabilities, management structure, and personal asset protection from creditors.

An LLC taxed as an S corporation will have more tax benefits and possibly taxable income deductions.

In contrast, an LLC taxed as a C corporation will have greater legal and financial protections (lower tax rates, less corporate paperwork, more equity financing options, no ownership restrictions, etc.).

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.

References:

  1. https://www.mass.gov/info-details/limited-liability-companies-and-limited-liability-partnerships

About The Author

Author
Delina Chantel Yasmeh, J.D./Tax LL.M, specializes in Mergers and Acquisitions at Deloitte and PwC, managing billion-dollar transactions. Educated in Accountancy at California State University and holding advanced degrees from Loyola Law School, she is highly skilled in tax law. Delina also dedicates time to pro bono work for women and children.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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