Selecting a business structure is one of your first and most crucial decision before
starting a business. There are numerous business structures in the United States, and
each has its own set of guidelines on how to conduct business. In the United States,
limited liability companies (LLCs) and corporations (C-corporations) are two popular
types of business entities. Each entity type has a few characteristics that are more
beneficial to some businesses than others.
Limited Liability Company (LLC)
A limited liability company is a type of corporate structure that protects its owners from
personal liability for the liabilities of the firm. Limited liability companies are hybrid legal structures that incorporate elements of both corporations and partnerships / sole
proprietorships.
A C Corporation
A C corporation is a legal structure for a corporation where the company’s assets are
separate from the owners’ assets. The owners of a C corporation are the shareholders. Shareholders contribute the money or assets the corporation uses to conduct its business and the corporation issues shares to shareholders as evidence of ownership.
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Key Differences Between A Limited Liability Company (LLC) And C Corporation
1. Taxation
An LLC is typically a pass-through entity, meaning the profits and losses pass through to the owners and personal tax returns. In contrast, a C-Corporation is a separate taxable
entity. It files its own tax return and is subject to corporate income tax. Shareholders of
a C-Corporation may face double taxation when profits are distributed as dividends, as both the corporation and the shareholders are taxed on the income.
2. Ownership Structure
C Corporations are hierarchical in nature. Shareholders select directors who manage the affairs of the corporation. The directors also appoint officers to run the day-to-day operations of the company. Shareholders with more shares are rewarded with more voting influence and higher stock profits. LLCs work like a partnership but with the same limited liability protection as a C Corp.
However, the division of ownership, profit distribution, and most other matters are
decided by private agreement amongst the members. Profits are not divided proportionally to a given member’s investment.
3. Stock
A limited liability company (LLC) is not permitted to issue stock shares while C
corporations are permitted to issue some stock classes with different voting rights.
4. Meetings
LLCs are also not obligated to hold annual shareholder meetings, which are a
requirement for C Corporations.
5. Governance Structure
LLCs are generally less formal and have more flexible management structures. They
can be managed by either the owners themselves (referred to as member-managed
LLCs) or by appointed managers (manager-managed LLCs). C-Corporations have a
more formal structure with a board of directors elected by the shareholders. The board
oversees the corporation and affairs and appoints officers to handle day-to-day operations.
6. Venture Capitalist
Unlike LLC, C Corporations attract venture capitalists who want to invest in the
business. Venture capitalists like to invest in C Corps so as to be able to receive
preferred shares, which can increase their profits as the company grows.
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CONCLUSION
Both business entities have distinct benefits, and what is right for your company may
change with time. As with all major business and financial decisions, it’s advisable to
consult with legal and tax professionals to determine the business structure that is best
suited for your business.
SIDEBRIEF
Sidebrief is a RegTech startup that has helped founders, entrepreneurs, and business
owners across borders to register their companies with ease and comply with
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