A complete guide on the differences between LLC and C corporation
Table of Content
Introduction
A Limited Liability Company (LLC) is a business form in the United States that combines the personal liability protection of a corporation with the tax efficiency of a sole proprietorship or partnership. It is the most frequent sort of business in the United States. Through stock sales, C corporations provide endless development opportunities, allowing you to attract some very wealthy investors. The number of investors in a C Corporation is also unlimited. We will examine the major differences between an LLC and a C Corporation in this article.
What is an LLC?
In the United States, a limited liability company (LLC) is a type of corporate structure that protects its owners from being found personally liable for the liabilities of the firm. Limited liability companies are hybrid legal structures that incorporate elements of both corporations and partnerships / sole proprietorships.
What is a C Corporation?
A C corporation (C-corp) is a legal company in which the owners, or shareholders, pay their own taxes. Profits earned by a company are taxed at both the corporate and individual levels, resulting in a scenario of double taxation.
What are the differences and similarities between LLC and C corporation?
An analysis of the fundamental differences and similarities between an LLC and C Corporation are given below-
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LLC |
C Corporation |
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Formation |
Article of organization |
Articles of Incorporation (C-corp is default corporation tax designation) |
|
Choice of taxation structure |
Yes. It is a Single Member LLC, SMLLC, or partnership for multiple members by default, as well as a S or C Corporation (by election) |
No. The profits of a C Corporation are taxed at the corporate tax rate |
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Taxes deductible |
Deductible on individual tax returns |
Not deductible on personal tax returns |
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Members (Directors) and Shareholders
|
Members are allowed. Shareholders are not allowed in an LLC |
Directors and Shareholders both are allowed in a C corp |
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Stock |
A limited liability company (LLC) is not permitted to issue stock shares |
C corporations are permitted to issue some stock classes with different voting rights
|
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Investing in equity |
It is more challenging to raise money and transfer membership interests |
Capital raising is simpler |
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Retaining Profits |
More challenging; whether cash is distributed or not, distribution shares are taxed |
It’s simple because dividends are only taxed when they are distributed |
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Records and paperwork
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There isn’t much paperwork needed. Annual state reports must be filed with the proper fee and can be sent in the mail, but most states allow or require online submission as well
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There must be official board and shareholder meetings and minutes Additionally, annual state reports must be submitted |
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Shareholders meeting |
Not necessary, it can have recorded actions |
Board meetings and formal shareholders are required |
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Suitable for |
Small companies with few investors |
Medium to large businesses with several shareholders (including institutional investors) |
Conclusion
As a result, many states have approved a new class of for-profit organization known as a “C corporation”. The interests of diverse stakeholders must be taken into account by the directors when making decisions in a C corporation. LLCs are more flexible. The operational agreement between the members may specify that individuals in charge of managing the company must take non-members’ interests into account.
Understanding what a corporation and an LLC are, how they are similar to one another, and how they differ is essential to making the best decision. There are, however, considerable non-tax differences as well. To make the best decision, business owners and their advisors should be aware of all these differences.
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