LLC vs C-Corp
Start your companyWhat is the difference between an LLC and a C-Corporation?
LLCs provide the same liability protection as C-Corps but do not have the formal corporate requirements C-Corps must observe. LLCs are taxed as pass-through entities. C-Corps pay a separate corporate tax in addition to the personal income taxes paid by shareholders on dividends.
LLCs provide the same liability protection as C-Corps but do not have the formal corporate requirements C-Corps must observe. LLCs are taxed as pass-through entities. C-Corps pay a separate corporate tax in addition to the personal income taxes paid by shareholders on dividends.
LLC
LLCs are the best entity type for companies with owners who seek:
Pass-through taxation by default
Flexible management structure
Ability to elect C-Corp and S-Corp taxation
No required formalities
C-Corp
C-Corps are the best entity type for companies with owners who seek:
Ability to raise capital
Positive public perception
Business credibility
Strict corporate formalities
LLC Advantages
Liability protection
Tax advantages
Simplicity
Tax planning options
Flexibility
Business loans
C-Corp Advantages
Liability protection
Tax advantages
Raising capital
Tax planning options
Public perception
Business loans
LLCs are the right entity for:
E-commerce & online businesses
The favorable tax options and easy upkeep of an LLC make it an attractive option for anyone wishing to operate an e-commerce or other online business in the US. Unlike C-Corps, LLCs do not have extensive formal requirements, such as annual shareholder meetings and boards of directors. As such, LLCs simplify company management and provide additional time to devote to your business.
Startup companies with few owners
An LLC offers the right combination of personal liability protection, pass through taxation, and business credibility desired by most startup businesses. Small business owners can use an LLC to gain access to business loans to scale their companies. When making the C-Corp vs LLC decision, you should consider the amount of owners your company has.
Service businesses including SaaS
Service-based business owners need liability protection to shield themselves from claims against the business by disgruntled customers. An LLC not only provides liability protection but also offers the ability to change the company’s taxation method to fit business needs. When deciding whether to form an LLC or C-Corp, you should consider whether you are a service business.
C-Corps are the right entity for:
Companies raising capital
The ability to issue unlimited shares to investors makes a C-Corp an attractive option for startup founders seeking to raise capital. Since most startups are not profitable for many years, the double taxation of a C-Corp should not necessarily increase a founder’s tax liability. However, if this is a concern, the shareholders can elect to be taxed as a pass-through S-Corp. When choosing between C-Corp vs LLC, you should consider whether you will be raising capital.
Companies joining incubators & accelerators
Sophisticated investors that participate in incubator and accelerator programs prefer to invest in C-Corps because they offer investors simplified taxation and corporate formalities that protect their investment. Since one of the big advantages of joining an incubator or accelerator is the access to a pool of investors and advisors, if you plan on joining such a program, you should consider forming a C-Corp. When deciding between forming an LLC vs C-Corp, you should consider whether you will be joining an incubator or accelerator.
Subsidiaries of foreign companies
C-Corps pay a reduced corporate income tax rate on company profits. If you are forming a subsidiary in the US, you may want to keep US profits separate from foreign income. In such a case, the corporate taxes levied on a C-Corp may be beneficial over the pass-through taxation of other entity types. While debating the C-Corporation vs LLC decision, you should consider the tax consequences of your decision.
LLC
Pros
Liability protection > An LLC shields your personal assets from your company’s debts and legal liabilities.
Simplicity > An LLC offers simplified maintenance requirements providing liability protection without the need for annual meetings, boards of directors, or officers.
Tax advantages > LLCs do not pay corporate income taxes. Instead, profits from an LLC are passed through to the owners directly, thereby reducing your tax liability.
Tax planning options > By allowing owners to elect to be taxed as an S-Corp, S-Corp, or pass-through entity, LLCs provide the most tax flexibility of all entity types.
Flexibility > An LLC can have one or more owners and can be managed by its owners or an appointed manager allowing you to tailor company management to your needs.
Business loans > An LLC allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “LLC” at the end, it lets customers and partners know you are a credible business.
Cons
Companies with many owners > Companies with many shareholders will be hindered by flexible management structure and minimal formal requirements of LLCs.
Raising capital > LLCs are not the right entity type for raising capital because investors do not favor the pass-through taxation and flexible structure of LLCs.
C-Corp
Pros
Liability protection > A C-Corp shields your personal assets from your company’s debts and legal liabilities.
Public perception > Most well-known companies are C-Corps. Owning a C-Corp tells the public that you are serious about scaling your business.
Raising capital > C-Corps have no limits on the amount of investors to whom they may issue shares. This is why C-Corps are the best entity type for raising capital.
Tax planning options > Owners of a C-Corp can elect S-Corp pass-through taxation which provides flexibility in tax planning and optimization.
Tax advantages > C-Corps pay reduced corporate income tax rates on company profits which can help you optimize on taxes in certain circumstances.
Business loans > A C-Corp allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “Inc.” at the end, it lets customers and partners know you are a credible business.
Cons
Double taxation > Unless it qualifies as an S-Corp, your C-Corp will pay income taxes on its profits and then shareholders will pay income taxes again on dividends issued.
Strict formalities > C-Corps are required to hold annual meetings, keep formal minutes of meetings, appoint a board of directors, and select officers.