C corp vs. LLC: What’s the difference?

C corp vs. LLC at a glance

When deciding what type of business you should start, the options can seem overwhelming. Two of the most common types of U.S. business structures are C corps and LLCs.

A C corp is a company that can issue shares of stock to an unlimited number of shareholders. C corps also require “double taxation,” meaning profits are taxed at the corporate level and at the shareholder level once dividends are dispersed. 

A limited liability company (LLC) is a pass-through entity that passes profits and losses to members for tax purposes, meaning members must pay their share of LLC profit taxes on their personal income tax returns. This structure is most chosen as a means to protect members from seizure or liquidation of personal assets in the event of a lawsuit or creditor claim against the company. 

LLCs are quick and inexpensive to setup and allow owners to divide profits based on their percentage of ownership as defined in the operating agreement. C corporations are more rigid in their setup and maintenance requirements. 

These two business types both protect the personal finances and assets (homes, bank accounts and cars, for example) of the owners against liabilities and debt incurred to the business. Both legal structures are required to have a registered agent and submit formation paperwork to their states. Also, both can have an unlimited number of members. 

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What is an LLC?

An LLC is a U.S. business entity that limits liability solely to the company while protecting the personal assets of the owners or “members.” It is also a pass-through entity, meaning tax liabilities pass through the LLC to its members to be paid on members’ individual income tax returns based on their ownership percentages.

For example, as a separate entity from its members, an LLC can have its own bank account, access credit lines and incur debts and other liabilities. The risk for these actions stays with the company and does not pass-through to the members. This allows the members to conduct business through the LLC without risk to their personal finances or assets should the LLC be sued or be the subject of a creditor claim.

LLCs can be easily established at a low cost by appointing a registered agent and filing articles of organization with the state in which it operates. You can start an LLC on your own or lean on an LLC formation service provider to help you.

LLC pros and cons

Pros: 

• Limited costs to start. 
• Low administrative maintenance. 
• No requirement for a board of directors. 
• No double taxation like C corporations have.

Cons:

• Only recognized in the United States. 
• Cannot issue stocks. 
• Limited ability to raise capital. 

LLCs can be established quickly and at a relatively low cost. They often require annual filings with the state they’re established in to maintain the LLC. However, other than that, they have fairly low administrative maintenance as compared to corporations. They also are not required to have a board of directors, allowing the LLC’s members to have a lot of discretion over the business’s management and day-to-day operations. 

Unlike a C corporation, LLC profits are only taxed once at the member level. The company itself does not have to pay taxes on its profits. Instead, taxes are passed to individual members to be paid on their tax returns. In contrast, a corporation is taxed at both the company and shareholder level, leading to a higher tax burden than an LLC.

However, LLCs do have their limitations. LLCs are only recognized by the 50 United States. They cannot go public to become traded on any stock market or issue any type of stock. This can limit their ability to raise capital which can limit their ability to grow. If you plan to operate internationally or foresee the need to raise capital from investors quickly, an LLC is not the best option for your business.

Ultimately, LLCs are a relatively easy way to start and maintain a business but do not experience the same ability to grow rapidly and globally that C corps do. This is because LLCs cannot issue shares or stock like corporations can, nor are they attractive to many types of investors or approved for many business loans.

What is a C corporation?

A C corp is a globally recognized legal structure for a company. Like an LLC, a C corp is a separate entity from its members, and members enjoy protections around their personal assets. C corps can have unlimited owners or “shareholders” that own a portion of the company. These shareholders invest in the company and are issued shares of stock as proof of their ownership. Shareholders divide the business’s profits among themselves based on the number of shares of stock they own.

C corp pros and cons

Pros: 

• Globally recognized.
• Easily scalable. 
• Can issue stock. 
• Straightforward operating laws.

Cons: 

• Highly regulated. 
• Requires a board of directors in most states. 
• Subject to double taxation. 

A C corp benefits from the ability to be recognized globally as a legal business entity, allowing it to scale operations. Additionally, its ability to issue shares to an unlimited number of owners and investors makes raising capital easier than in any other business type. Corporate law is also well established as this is the oldest type of legal business entity. This can make C Corps the most straightforward way of operating a business.

In return for these benefits, C Corps face tougher regulations. There are strict guidelines about how meetings should be held and how long records must be kept. In most states, you are also be required to have a board of directors, adding an additional administrative layer. If you operate in a state where a board of directors is not required, shareholders themselves take over a board of director’s duties and role. 

C Corps also face double taxation. The business pays corporate income as its own entity and the shareholders pay tax on any dividends they receive from the business. The corporate tax is levied on revenue the business has made after subtracting losses, credits and other deductions that apply from its gross profit. Much like personal income tax, you will need to do a thorough accounting of what can and cannot be deducted in order to properly manage a C corporation’s tax obligations.

Key differences: C corp vs. LLC 

While weighing your options between a C Corp and an LLC, there are several key considerations. This includes how many individuals and entities you need to distribute ownership among, tax considerations, the ability for your business to be recognized globally, each entity type’s regulatory requirements and how each type can and cannot raise funds.

Consider these differences between a C corp vs. an LLC:

	C CORP	LLC
Ownership restrictions	Unlimited number and types of shareholders allowed	Unlimited number of members and member types allowed
Limited liability protections	Protects personal assets of shareholders	Protects personal assets of members
Global or domestic legal status	Recognized and can operate globally	Not recognized globally but can operate in all 50 U.S. states
Stock types	Preferred and common stock options	Cannot issue stock
Tax policies	Pays corporate income tax; Shareholders are also taxed on dividends received from the corporation	Members pay taxes on income earned; LLCs are not subject to double taxation
Board of directors requirements	Requires a board of directors in most states	Does not require a board of directors

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When choosing which business type is right for you, you’ll need to consider your future growth plans for the company, your desire to operate internationally, whether you want or need to raise capital and your ability to keep up with administrative and regulatory compliance issues.

Understanding tax designations

C corp taxation guidelines

C Corps are notorious for being subject to double taxation. This is because the corporation and the shareholder are each their own entity and are separately subject to taxation. The C corporation is subject to corporate income tax. Once profits are distributed to shareholders as dividends, they are taxed on the income they receive from the corporation. 

C Corps do have a number of opportunities to reduce their tax burden. The operator of the business can be paid as an employee and, as a result, is not subject to self-employment tax (the employer’s half of Social Security and Medicare tax). Corporations can also write off business expenses, losses, credits and identify other deductions that can lower the corporation’s tax burden before it is taxed. 

A reputable corporate accountant can help you lower the corporation’s total tax burden as well as mitigate costs associated with double taxation.

Understanding an LLCs tax designation

LLCs are most often taxed as pass-through entities. A pass-through entity does not pay any corporate income tax. Instead, the tax liability passes through to the members of the LLC. Those members then pay the tax on their personal income tax returns based on their percentage of ownership.

However, LLC members are not considered employees. While an LLC may have employees, its owners and members are not counted as part of that group. As a result, they do not receive regular paychecks to have their Federal Insurance Contributions Act (FICA) tax deducted. LLCs members are required to pay a 15.3% FICA tax (called self-employment taxes), whereas, in a corporation, half of those taxes are paid by the corporation. 

Alternatives to consider

If neither a C corp nor an LLC seems quite right for your business, you may also consider an S Corp, PLLC or nonprofit business structure. Much like LLCs and C Corps, each of these business types has pros and cons you will need to weigh before determining which is right for your company. Here is a look at each of these options: 

• Professional limited liability company (PLLC): A PLLC provides specific services to clients. Most of the time, professionals must obtain licenses, certifications or legal authorizations to offer these services. All members of a PLLC must have authority to offer such services. Examples include architecture, legal or medical practices or firms. 
• S corp: An S corp is a corporation that can issue one type of stock to shareholders but is not taxed at the corporate level like a C corporation. Its members are paid a salary for their services to the company and receive dividends, for which they may or may not have to pay personal income tax, depending on their status with the company.
• Nonprofit business: A nonprofit organization does not earn a profit. Instead, any surplus earnings are invested back into the business to further its purpose. Like a corporation, a nonprofit must have a board of directors. However, unlike a corporation, an LLC or an S corporation, nonprofits do not pay federal income taxes on earned income as long as they have been granted tax-exempt status.

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