C corporations vs LLCs? They are both registered business entities that shield owners from personal liability for the company’s debts and obligations.
Business entities that are LLCs or corporations act to shield an owner from any personal liability for the obligations and debts assumed by the company, but there are some important distinctions between them. The way an LLC is formed, owned, and governed differs from the way a corporation is.
LLCs are subsets of the tax structure for corporates. LLCs do not pay taxes but are required to meet the many requirements which are very similar to those that govern C corporations and other pass-through entities.
View our complete guide on (limited liability company) LLC.
LLC and a Corporation
When you decide to start a small business, one of the first decisions that need to be taken is how you will organize the company entity. Most owners of small companies will choose, as their business structure, to create an LLC or a corporation.
For any small business owner, the two key elements that can influence the choice of LLC or corporation are finance and time. The way how your company is structured will largely contribute to your tax burden, the ease of raising money from investors, and the flexibility you have for future growth.
To add to that, your choice between an LLC and a corporation can have an effect on the time you need to spend to educate your company entity and to ensure its good standing.
Limited Liability Company and Corporation – The Differences
The distinction between these two different forms of company formation s a bit hazy. However, these distinctions can matter for your company. There is a considerable difference in the way LLCs and corporations are created, owned, taxed, and governed.
Before you form an LLC, its articles of organization, a legal document, has to be filed with the business registration department of the state. These articles of organization are a documented formality that gives basic information about the LLC, like names of owners, name of the LLC, and its address.
Once the articles of organization are filed, the best technique is to see to the drawing up of an LLC operating agreement. This gives a business blueprint that details the share of each partner, and the rights and responsibilities that they have.
S-corporations and C corporations are two different types of businesses. In either case, it is necessary to file articles of incorporation with the business filing agency of the state.
The company’s existence gets established through this legal document, the articles of incorporation. Included in this are its name and address, and the number of shares. To establish the company after submitting the articles of incorporation, it is needed to complete some additional procedures. This process does not have to be followed by LLCs.
You will also have to draft corporate bylaws, make your choice for a board of directors, hold the first meeting of the board, and an initial meeting of shareholders, and offer your stock in shares.
Ownership and Raising Finance
Corporations have more complicated structures of ownership than LLCs, but is the form that is preferred if there is any need to raise finance in the future.
The responsibility in a business is shared between three parties, shareholders, officers, and directors. Shareholders are those that have a stake in the business. They are the ones who choose the board of directors who have to do any needed long-term strategic thinking.
The board of directors then appoints executives like a CEO, CMO and CTO for the daily management of the company. Some companies can have just a single person who is the only shareholder, director, and officer.
An LLC is owned by its members. An LLC can have a single member, or be a multi-member LLC with has many owners. There are some multi-member LLCs that are member-managed, with every member contributing to the daily running of the company.
Other LLCs can be manager-managed, and the members of the LLC choose to run the firm through any one of its members or an outside individual.
Investors in a corporation can trade stock and either keep their interest in the corporation or sell the stock and terminate their interest.
C-corporations can create different classes of stock, each distinct from the other so that it attracts angel investors and venture capitalists. LLCs can also attract investor capital. But it is difficult, as most investors prefer dealing with corporations.
It is the tax status that makes for the most difference between corporations and LLC. C-corporations are taxed in the same way that corporations are. An owner of an LLC can decide on whether he is taxed as a corporation or as a pass-through entity. An owner of a pass-through entity has the responsibility of paying the taxes on personal returns that can be based on the profit made from the company.
Businesses tend to avoid C-corporations because of double taxation. At the corporate level, the business income gets taxed, and shareholders again have to pay taxes on any dividends that they receive from the C-corporation. Double taxation of the C-corporation can be avoided if all profits are reinvested in the firm, less that which is required for paying a fair wage.
C corporations are the common type of corporation, you can also opt for the creation of an S corporation with the IRS.
Pass-through firms are taxed as pass-through entities but are restricted to having no more than 100 shares of any class of stock, and all the shareholders need to be citizens of the United States. This does give you better tax options, but it can deny you the flexibility you may need to accept large investments from investors.
It is the owners of an LLC who have to choose whether they are taxed as corporations or as pass-through entities, which is in contrast to the way shareholders in a corporation are taxed.
Getting taxed as a pass-through entity requires you to report the share of income from the business on your personal tax returns, just like you would have to do in an S-corporation. The taxes you pay on the revenue will depend on the rate that your personal income attracts.
Ongoing Governance and Paperwork
In an ideal situation, once your company is established, your sole focus should be on its daily activities, like recruiting and marketing. However, keeping your LLC or corporation operational, does require you consider regulatory obligations that need to be fulfilled. Company owners will find these more demanding than individuals will.
Once a company s incorporated, businesses have to do the following so that their good standing with the state is maintained:
Develop corporate bylaws and follow and adhere to them.
Creation of a board of directors and holding regular meetings of these boards.
Regularly meet with shareholders.
Meetings must be documented and minuted.
Issue stock certificates.
Record any stock transfers
Reports have to be regularly made to investors.
LLCs in any state do not have to follow these formalities, though they would have to establish an LLC operating agreement and file annual reports. While it is not necessary for an LLC to document any member’s equity interest, or to hold regular meetings, doing so always proves beneficial.
The formalities for LLCs are fewer, leading to lower annual fees that need to be paid to the state. Their legal and accounting expenses will be lower.
Similarities of LLCs and Corporations
Even though these two business entities are distinct from each other, they can be comparable in some ways. Both these enterprises have to be registered, so the firms can only be started through the business registration agency of the state. Both also limit the liability of investors.
Registered Business Entities
If you have decided that you want to start a company tomorrow you may not establish an LLC or corporation. Depending on the number of owners of a business, by default, they are partnerships or owned solely by one proprietor.
Starting a company requires you to get the necessary authorizations and trade licenses. To form an LLC or corporation requires you to take some further action.
Formation paperwork has to be submitted to the business registration agency of your state. This procedure, called incorporation is a must for an LLC’s a business and company registration. Your corporation or LLC can only be established after the state has accepted and found proper, the papers filed with them.
Limited Liability Protection
One major benefit that comes to LLCs and corporations, as compared to businesses that are unincorporated is that their owners have limited liability. This limitation of liability implies that business owners do not have any personal responsibility for the debts and obligations that the firm acquires during its ordinary course of business.
LLC or Corporation – Which Should You Choose?
You now need to decide how the distinctions between these business entities apply to your company. Ideally, you should take the help of a tax professional or business attorney who can look at your financial statements and other books.
Compared to a corporation an LLC is more flexible and has to deal with fewer regulations. Some key factors that need to be considered while deciding between an LLC and a corporation are:
Advantages of LLCs
Lets you decide how you will be taxed and to avoid double taxation
Annual fees are lower
Fewer requirements of governing
Advantage of Corporations
You can develop an IPO with the help of investors who are more willing to fund you
Attract top talent by offering stock options as rewards for hard work
Corporations are more well known
Disadvantages of LLCs
It is difficult to attract investors
Disadvantages of Corporations
The paying of dividends invites double taxation
Corporate governance requirements can be time-consuming and expensive.
LLC or Corporation Setup
Once you have made a decision on whether your company will be an LLC or a corporation, you will need to set up the company so that you can start earning some money by providing services. To do this on your own can require a lot of your time, and most companies, LLCs or corporations, prefer to have some assistance.
There are professional sites that can help in the incorporating of a business for a flat fee of around $150 or so.
If you need further assistance, get yourself a business attorney to help you set up your LLC or corporation. If your business lawyer is experienced, you will get help in deciding the business entity that is right for you considering all the advantages and disadvantages of each of them, getting personalized guidance, and also ensuring that all papers are correctly submitted.
An LLC brings with it many benefits and is also simpler to start as well as run. The main difference between LLCs and corporations is that an LLC will not have shareholders or other stakeholders who will require corporate governance. It ultimately comes down to your tax rate, patience for paperwork, and governance standards, and your own preference.
You do not have to worry about double taxation, will have less paperwork, and fewer regulations to worry about. However, if you feel you will need to raise venture capital in the future it is better to set up as a corporation. You can change entities at a later date but this can be costly and may not make an LLC the best choice for starting a business.