What are the key differences between an LLC vs C Corp? The key differences between an LLC and a C Corp relate to the company’s tax rules, ease of operation, investment opportunities, and transfer of ownership. In general, LLCs are easier to operate and avoid having to pay corporate tax. While C Corps are more attractive to potential investors and have a simpler method of transferring ownership.
WHAT’S THE DIFFERENCE BETWEEN AN LLC AND A C CORP?
While there are many similarities between an LLC and a C Corp such as limited liability protection, ownership flexibility, and improved credibility compared to a sole proprietorship or partnership – there are also some key differences.
Understanding the key differences between an LLC and a C Corp will help you make an informed decision as to which entity best suits your business. The key differences between LLC vs C Corp relate to taxation, operation & management structure, ability to raise capital, and transfer of ownership.
Below we explore each of these in some detail. But first up, we need to take a look at what is an LLC and a C Corp.
LLC vs C Corp
• When Should You Choose a C Corp?
• Key Differences LLC vs C Corp
WHAT IS AN LLC?
An LLC is a type of company structure used to run a business. An LLC is recognized as a legal entity separate from its owners. LLC stands for Limited Liability Company and the company structure protects its owners from being held responsible for the debts of the company.
An LLC combines some of the characteristics of a sole proprietorship and partnership with those of a corporation. In addition to offering limited liability, an LLC also has a flexible management and operational structure, and some attractive tax advantages. For more see – What Is an LLC?
WHAT IS A C CORP?
A C Corp, also known as a C corporation, is a type of legal structure for a corporation business in the US. It is the most common type of corporate business structure. C Corp companies are owned by shareholders and are usually publicly traded companies.
One of the biggest differences between a C Corp and an LLC is that a C Corp is required to pay both federal and state taxes. This means C Corps are subject to double taxation because both the business and its owners must pay tax on company and personal earnings.
C Corp companies are owned by shareholders. And, the shareholders are protected from the potential liabilities of the company. The company structure shields its owners from company debt and legal actions taken against the company.
C Corps must hold annual meetings and elect a board of directors to run the company. The company gets its name from the rules and regulations governing its operation in subchapter ‘C‘ of the Internal Revenue Code.
WHEN SHOULD YOU CHOOSE A C CORP?
Your company does not have to be large or have a considerable number of shareholders to benefit from structuring itself as a C-corp. You just need to understand the formation and operational requirements of C Corp and have a well-thought-out strategy for how to take advantage of the company format and tax code.
To understand when you should choose a C Corp structure for your business you need to understand the benefits and disadvantages of a C Corp. Once you have grasped the basics of how the company structure works you can decide for yourself if it is a good match for your business.
Additionally, you should seek the advice of a professional business advisor such as a corporate attorney to guide you through your decision-making process. Below we take a look at the pros and cons of a C Corp and how they compare to an LLC.
C CORP ADVANTAGES & DISADVANTAGES
What are the advantages and disadvantages of a C Corp business structure? Below we run through the key pros and cons of forming a C Corp for your business.
C CORP ADVANTAGES
LIMITED LIABILITY PROTECTION
Just like an LLC, a C Corp affords limited liability to all its employees, shareholders, directors, and officers. The company debts and legal obligations of the C Corp cannot be transferred to any individual associated with the company.
This means the company owners are not held responsible for business debts and liabilities in most cases. The company owners can only lose the amount they invested in the corporation. A C Corp is recognized as a separate legal entity and as such, its debts are its own.
RAISING CAPITAL
Another key benefit of a C Corp is its ability to raise capital more easily compared to other company structures. C Corp companies appeal to potential investors because of their clearly defined ownership and management structure.
Unlike an LLC, a C Corp can obtain capital through equity financing. Investing in LLC and S Corp companies can be difficult due to restrictions placed in their governing documents. It is easier to sell shares in a C Corp than to sell an ownership interest in an LLC.
The ability to sell shares of stock allows a C Corp to raise large volumes of capital quickly to fund expansion or future projects.
NO SHAREHOLDER RESTRICTIONS
A C Corp can have an unlimited number of shareholders. This allows C Corp companies to continually grow without impediment. And, unlike an LLC, there are no restrictions on the country of origin or corporate status of shareholders.
However, once a C Corp reaches a total of 500 shareholders and a value of $10 million in assets it must register with the Securities and Exchange Commission under the SEC Act of 1934. The SEC is an independent federal government agency that protects investors and maintains order in the securities markets.
MULTIPLE CLASSES OF EQUITY
C Corps can offer different classes of stock which allows shareholders to buy shares that reflect how involved they want to be with the company. This allows a C Corp to confine decision-making to one class of shares and enable sharing of company profits in a different class.
It is also an attractive feature when it comes to raising capital as it offers different levels of participation to potential investors. For example, preferred stocks come without voting rights while a common stock generally holds one vote per share. And, class A and class B stocks usually carry different numbers of votes per share.
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EASY TRANSFER OF OWNERSHIP
A C Corp allows for easy transfer of ownership. When assessing the differences between an LLC vs C Corp – transfer of ownership is a significant difference. It is easier to transfer ownership of a C Corp than it is for an LLC.
Ownership of a C Corp is transferred through the sale of stock. As the stock is passed from one owner to the next it also transfers all economic and management rights from the previous owner to the new owner. It is a straightforward process.
A shareholder is free to sell their shares on the market at any time. With an LLC, an owner can sell their economic rights to a potential investor but they cannot sell their management rights. Transfer of ownership is more difficult and is often governed by the LLC Operating Agreement.
PERPETUAL EXISTENCE
A C Corp exists separate from its owners and is recognized as a legal entity. This means it has perpetual existence and will continue to exist even if its owner leaves or dies.
Once a C Corp is formed it will continue to exist until it is dissolved. Additionally, the transfer of stock from one owner to another has no impact on the existence of the company.
WELL-ESTABLISHED CORPORATE LAW
Corporate law governing the operational requirements of a C Corp is very well established. A C Corp is the oldest type of corporate business structure and the legal aspects surrounding its formation and governance are clearly understood.
This level of clarity means management can make decisions while understanding the legal implications of their decisions. LLC companies on the other hand are still establishing legal precedents as their corporate law has not yet been as clearly defined.
CORPORATE CREDIBILITY
Forming a C Corp will add greater credibility to your business. Once incorporated your company will generally be held in higher regard by the public, suppliers, and lenders. The company will benefit from a more professional and legitimate image.
CONSOLIDATED RETURNS
Another advantage of a C Corp is its ability to file consolidated returns. This means the company can file the unused losses or credits of one corporation to offset the income of another to gain a tax advantage.
Filing consolidated returns allows a C Corp to receive tax benefits in the current year rather than having to wait for carryovers in future years.
TAX-DEDUCTIBLE EXPENSES
C Corps can deduct tax for business expenses such as fringe benefits. Tax deductions can be made against expenses incurred for benefits such as medical insurance and disability insurance.
C CORP DISADVANTAGES
DOUBLE TAXATION
One of the main disadvantages of a C Corp is that it is subjected to double taxation. A C Corp must pay corporate tax on any earnings made at a rate of 21%.
The remaining earnings are then passed to the shareholders who then pay personal income tax on any dividend received. The earnings of a C Corp are effectively taxed twice – at a corporate and personal level.
An LLC, on the other hand, benefits from pass-through taxation. This means all company profits of an LLC pass through to their owners without being taxed. Owners then pay tax on these earnings as part of their personal income tax return. For more see How LLCs Are Taxed.
FORMATION COSTS
Establishing a C Corp will involve a significant formation cost. There’s no way around it. No matter which state you choose to form a C Corp in, you are going to be faced with a number of fees to get your business incorporated.
C Corp formation fees include – filing, licensing, and legal fees. And, in most cases, state taxes will also have to be paid. The cost of forming a C Corp varies from one state to the next but the average cost is over $600.
COMPLEX OPERATIONAL REQUIREMENTS
C Corps are more difficult to run compared to an LLC. They are subjected to tighter government oversight and must comply with strict tax rules and corporate regulations.
When comparing an LLC vs C Corp it is clear that an LLC is much easier to run. LLC companies have the opportunity to define their own operational rules in the form of an operating agreement. They can apply a relatively informal management structure.
C Corps on the other hand must elect a board of directors and hold regular board meetings. And, they must comply with formal record-keeping requirements such as recording minutes for meetings.
NO CORPORATE LOSS DEDUCTION
Shareholders of a C Corp cannot deduct company losses on their personal tax returns. No personal write-offs are allowed. This is in contrast with S Corp companies where shareholders can write off company losses against their personal income tax return.
ACCRUAL ACCOUNTING
C Corps must use an accrual basis of accounting. Other business structures have the option to choose between accrual and cash accounting methods. Accrual accounting is a method of accounting that records revenue or expenses when a transaction occurs rather than when payment is made or received.
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LLC VS C CORP – THE KEY DIFFERENCES
What are the key differences between an LLC and a C Corp? Now that we understand the advantages and disadvantages of a C Corp, let’s compare the differences between an LLC vs C Corp.
FORMATION COSTS
The formation of both LLC and C Corp companies involves formation costs. The costs vary from state to state and include filing fees, business license fees, state taxes, and federal taxes. In general, forming a C Corp will be more expensive with the average fee being in excess of $600.
LIMITED LIABILITY PROTECTION
Both LLC and C Corps offer their owners limited liability protection. This means that in most cases the owners of the company cannot be held responsible for the debts or legal actions taken against the company. Both LLC and C Corps are recognized as separate legal entities.
TAXATION
One of the biggest differences between an LLC and a C Corp is how they are taxed. An LLC benefits from pass-through taxation.
This means company earnings are not taxed at a corporate level and earnings are passed through to the company owners in full. Company owners then pay tax on the earnings received as part of their personal income tax return.
C Corps on the other hand are subjected to double taxation. Company earnings are first subjected to corporate tax at a rate of 21%. And, the remaining profits are then received by shareholders in the form of dividends. Shareholders then must pay income tax on these earnings in the form of their individual personal tax returns.
EASE OF OPERATION
Another key difference between an LLC and a C Corp is the ease of operation. An LLC benefits from having a relatively informal operational structure. And, company owners are largely free to define and implement their preferred operational rules in the company’s Operating Agreement.
A C Corp on the other hand is governed by a much stricter set of rules that lay out how the company must be run. For example, shareholders must elect a board of directors to run the company and regular meetings must be held and minutes recorded.
INVESTMENT OPPORTUNITIES
C Corps have the edge when it comes to raising capital. C Corps are the preferred investment option for most investment managers and are largely favored over LLCs. A C Corp has a more clearly defined ownership and management structure – which appeals to potential investors.
Transfer of ownership involves the sale of stock from one individual to another. And, when stock is sold it transfers all economic and management rights to the new owner.
Investing in an LLC is more complex and it can be difficult to attain management right as these are tied up in the company’s operating agreement.
SHARE HOLDERS & OWNERSHIP RESTRICTIONS
C Corps and LLCs have similar ownership structures. C Corps are owned by shareholders and can have an unlimited number of owners. And, an LLC is owned by its members. It too can have an unlimited number of owners.
There are little or no restrictions on who can be a shareholder of a C Corp. An LLC however cannot be owned by a bank or insurance company.
TRANSFER OF OWNERSHIP
Transfer of ownership is a key difference between an LLC and a C Corp. Transferring ownership is can be a complicated process in an LLC. While selling an economic interest may be straightforward, selling a management stake in an LLC can be difficult.
Typically, an LLC member needs approval from other LLC members before they can sell a stake in the company. Transferring ownership in a corporation couldn’t be easier and is executed by selling shares from one person to the next.
When stock is passed from one person to the next it also transfers all economic and management rights to the new owner. The process is clear and simple. Furthermore, different classes of stock allow investors to choose between common stock that comes with voting rights or preferred stocks that come with just economic rights.
CORPORATE LAW
Another key difference between an LLC vs C Corp is the corporate law that governs each business structure. A C Corp is a much older business entity and the corporate law that governs its existence is better established and more clearly understood. This means managers of C Corps can make decisions with a clear understanding of the potential consequences of their actions.
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About the Author
Jason Roth: Editor in Chief
Jason is editor in chief at My LLC Guide. He holds a wealth of business management experience and has been advising companies on business formation issues for many years. Jason specializes in resource planning management, staff utilization, and productivity consulting.
He has worked predominantly in the west coast area where he graduated from the Marshall Business School at the University of South California. When he’s not working in his business advisory role, Jason likes to climb on his Indian Scout motorbike and enjoy the open road.