Business Structures: LLCs vs. C-Corps

Business Structures: LLCs vs. C-Corps

24.05.2022 17:33 by Clemta

If you are a startup aiming to receive an investment, choosing the C-Crop structure might be better. If you are an e-commerce owner, online service provider, or freelancer, we would advise you for an LLC structure to avoid corporate tax.

Which entity type should I choose to form my new business? This is a very frequently asked question among new business owners. The answer is the better option depends upon you and what you want to accomplish with your business.

There are many entity types, but there are two company types non-residents can choose from; LLC or C-Corp. 

We're going to break down the business structures with information every new business owner needs to know below:

 

                    LLC Properties

                  C-Corp Properties

Owners are called

                         Members

                       Shareholders

Personal assets

                      Are protected

                       Are protected

Taxation

                  Standard Taxation

                     Double Taxation

Profits

                 No reinvesting profits

                    Reinvesting Profits

Documentation

                 Operating Agreement

                    Post-Incorporation

 

Why should you form an LLC?

1. Limited Liability Protection

LLCs provide liability protection to their members. 

Limited liability protection means that your personal assets are protected against debts, losses, and any court rulings against your business.

 

2. Pass-Through Taxation

With an LLC, you will pay your personal tax return taxes. The process is called pass-through taxation. 

Single Member LLCs tax is also due April 15th, and for Multi-Member LLCs, the deadline for federal taxes is March 15th. 

 

3. Flexibility

LLCs give much more flexibility than corporations; you can choose whatever management structure and taxation structure you want with an LLC.

You can be taxed as a sole proprietor, an S-Corporation, and a C-Corporation. 

 

4. Formation

LLCs are formed with an Articles of Organization. After the formation process, you should have an Operating Agreement. 

The Operating Agreement outlines how your LLC will operate. 

 

5. Less Paperwork

Managing an LLC is much easier than a corporation since there is much less paperwork. Additionally, LLCs are easier to manage in compliance with federal and state laws.


Disadvantages: 

Due to an LLC's single taxation, one might tax the total earnings by their income tax liability at a single level. This single level of taxation rate might rise up.

 

Why should you form a C-Corp?

1. Liability Shield

Corporations have a solid liability shield for their owners.

2. Getting Invested

The management structure of a C-Corp is always favored by investors. Despite the annual meeting requirements, having officers and a board of directors will grant your company a solid and reliable management structure before the prospect investor.

3. Taxation

There is a double taxation obligation with the C-Corps, but the 21% tax rate is a flat rate. Having a flat corporate tax rate of 21% may be advantageous for a C-Corp. Yet, with the double taxation issue, taxation of the dividends must be taken into consideration.

Disadvantages: 

One of the biggest is that you are objected to double taxation if you form a corporation.

 

What does double taxation mean?

Double taxation means that there's taxation both at the corporate level and individual level. C-Corporations pay taxes on their income, and the shareholder also pays taxes If there is a distribution. 

So, with a C-Corporation, you will be obliged to pay taxes on the same income. 

The current corporate tax rate is 21%, and the deadline for federal taxes is April 15th. You may read further about the federal taxes through our blog post here.

The individual tax rate on corporate income would depend on your personal tax rate. 

The inflexibility of the corporate structure is another disadvantage. The company is going to need to have a board and executives. 

There is a lot more administrative work If you form a corporation. 

Corporations are required to have Articles of Incorporations and also the Corporate Bylaws within the post-incorporation. Corporate bylaws are a set of regulations adopted by a corporation. 

Also, you will need to elect a board of directors. The board represents the shareholders of a corporation. Additionally, you will have to hold board and shareholder meetings. 

Both board and shareholder meetings are required to occur at least once a year, and details of those meetings must be kept in order to maintain corporate status. 

Finally, you will have to issue shares in the company based on what was invested as capital. 

All these requirements can be regulated with a post-incorporation set which is included in Clemta's Form and Structure My Company package!

What are the advantages of both entity types?

Limited Liability Company (LLC) Advantages

                                                                                                                Flexibility to choose how you’re taxed.

                                                                                                                                              Lower annual fees.

                                                                                                                        Fewer governance requirements.

Corporation (C-Corp) Advantages

                                                             Easier to raise money from investors and make an initial public offering.

                                                                      Offering stock options to incentivize employees and attract talent.

                                                                   Bankers, judges, and investors are more familiar with corporations.

 

What are the similarities between C-Corp and LLC entity types?

 

  1. Limited Liability Protection
  2. Separate Entities
  3. State Requirements


What are the differences between C-Corp and LLC entity types?

One of the most significant differences between these entity types is taxation. Corporations are obliged to double taxation, as explained above.

On the other hand, LLCs only pay tax on the individual level instead of paying double taxes.

LLC companies don't pay taxes directly, but the income earned through the LLC is passed to the owner, where taxes are assessed.

Bottom Line

You might want to choose a corporation instead of an LLC if you would like to go public or receive investments. 

On the other hand, forming an LLC and converting it to a C-Corp is also possible. 

If you are a startup aiming to receive an investment, choosing the C-Crop structure might be better. If you are an e-commerce owner, online service provider, or freelancer, we would advise you for an LLC structure to avoid corporate tax.

As Clemta, LLC or C-Corp, which entity type would you like to choose? We offer a complete consultancy in terms of your incorporation and post-incorporation procedures. You may check Clemta website and pick out of our services according to your needs with one click. Clemta will handle the rest for you.