The primary difference between an LLC and a C-Corporation can be categorized into two key areas: taxation and corporate formalities.
Taxation Difference Between an LLC and a C-Corporation
LLCs have the luxury of electing their own tax status, meaning that the founders of the LLC (called members) get to decide whether to be taxed as a corporation, or as a partnership. The vast majority of LLCs elect partnership taxation because of its more favorable “pass-through” nature.
Pass-through taxation means that all the income the LLC makes is taxed only once, at the level of the individual members on their individual tax returns. For example, at the simplest level, if the LLC has two members that each own 50% and it generates $1 million in profit, the two members will be taxed for $500,000 of income on their individual tax returns.
C-Corporations, on the other hand, face the burden of what is known as “double taxation.” Double taxation means that income is taxed on two different levels: once at the corporate level, and again at the level of the individual shareholders. This creates greater overall tax liability for the owners of a C-Corporation compared to the owners of an LLC.
Corporate Formalities Difference Between and LLC and a C-Corporation
The other major difference between an LLC and a C-Corporation comes down to what is known as “corporate formalities,” which are the basically the rules and restrictions governing the activities of the company.
LLCs have great freedom when it comes to corporate formalities. The members are the owners and controllers of the company. They can decide whether they want to run the company themselves, or if they will hire managers to run the day-to-day operations. Members of an LLC can establish virtually whatever rules they want regarding management, meetings, monetary distributions to the owners, and more.
C-Corporations have significantly stricter requirements due to their more complex structure. C-Corporations are owned by the shareholders, run by the officers, and overseen by a board of directors. Sometimes the same person or people can fulfill all of those roles, but there are much more formal rules in place about how those roles interact compared to an LLC. C-Corporations are legally required to pass board resolutions approving of major company decisions, hold regularly scheduled shareholder meetings, and keep “minutes” for each meeting to record what was discussed.
Which One is Right for Your Company
It may seem that an LLC is the obvious choice, due to the lower tax burdens and greater flexibility. Many times, that is the case, and LLCs have become by far the most popular type of business entity. However, there are also some major reasons why a company should still consider incorporating as a C-Corporation.
Generally, companies that are targeting high growth, large investments from angels or venture capitalists, and a potential acquisition or IPO in the future are more likely to be C-Corporations. Larger companies are actually sometimes better off with a more formalized structure due to the much greater number of people that are required to be employees, investors, officers, directors, and shareholders in order to effectively operate the business.
Anytime you are considering the difference between and LLC and a C-Corporation before incorporating your business, it is always wise to consider your unique business and your goals, as well as to consult with a lawyer about which entity choice is right for you.