One of the most crucial choices when starting your own business is selecting the right structure. Various business structures exist, each with its own set of guidelines and requirements.
New and small business owners usually prefer either a Limited Liability Company (LLC) or a C Corporation. In this blog, we’ll delve deeper into these two models to guide you through your selection.
Here’s what we will cover:
- What’ is an LLC
- Benefits of Forming an LLC
- What’s a C-Corp?
- Benefits of Forming a C-Corp
- Similarities and Differences Between an LLC and a C-Corp
What is a Limited Liability Company (LLC)
An LLC structure provides its members with limited liability protection, so their personal assets are protected from the company’s debts and liabilities. LLCs are “hybrid” entities as LLCs blend features of partnerships proprietorships with corporations.
Since LLCs follow pass-through taxation, they don't directly settle federal income taxes on their earnings. Instead, the profits are passed through to the members of the business, who then report these earnings on their individual tax returns.
Benefits of Forming an LLC
- Liberty on Ownership Percentages: Members have the flexibility to determine the ownership percentages, which may be influenced by their financial contributions to the company or criteria outlined in the business's Operating Agreement.
- Tax Benefits: All earnings are subject to personal income tax rather than corporate taxes, so the business itself does not pay taxes. This eliminates the issue of "double taxation", where profits are taxed at both the corporate and individual levels.
- Liability Protection: An LLC protects the owners from personal liability for debts. In the event of the company going bankrupt or encountering a lawsuit, the personal assets of the owners and/or investors are typically protected.
- Less Formality: LLCs involve fewer formal requirements and less paperwork for tasks such as reporting, meetings, and bookkeeping when compared to corporations.
- Flexibility: An LLC operates with greater freedom by not having a board of directors, so there's no need for annual meetings to elect new board members.
What is a C Corporation?
C corporations (C-corps) offer a high degree of separation between the company and its owners (shareholders), providing the owners with personal liability protection. However, profits of the business face taxation both at the personal level and the corporate level, leading to what's called "double taxation."
Entrepreneurs might be drawn to this business structure due to its potential for substantial growth.
Benefits of Forming a C Corporation
- Stock Shares: A C-corp can issue stock shares, which enables the company to raise substantial amounts of capital. These funds can then be utilized to support growth initiatives and new ventures.
- Limited Personal Liability Protection: C-corps provide protection against personal liability for directors, employees, officers, and shareholders. This is beneficial because it ensures that the legal responsibilities of the company don't become personal obligations for anyone connected to the business.
- Continuation Despite Changes: The corporation can keep running even if its owners depart, get removed, undergo changes, or if there are replacements in management.
- International Operation: Corporations hold international recognition.
Similarities/Differences Between LLCs and C Corporations
Similarities:
- Liability Protection: Both LLCs and C-corps safeguard their owners, ensuring that their personal assets cannot be taken to cover the business's liabilities and debts.
- Registration of the Business: Creating an LLC involves submitting Articles of Organization to the state, whereas establishing a corporation requires the filing of Articles of Incorporation. Despite the distinct documents for each business type, the details they contain, including the company's name, owners' names, and addresses, are typically very similar.
Differences:
- Taxes: In terms of federal income taxes, C-corps face double taxation, with taxes imposed at both the individual and corporate levels. On the other hand, LLCs follow a pass-through taxation model. This means that income is assigned to the LLC's members, who then pay individual income taxes on their respective earnings.
- Business Structure: If you're looking for a structure that provides flexibility and requires less paperwork, opting for an LLC can be a favorable decision where members have the liberty to organize their business structure according to their preferences. However, it's essential to outline in your Operating Agreement how the LLC will operate and manage any changes. On the other hand, C-corps follow a more inflexible structure, requiring the appointment of a board of directors and regular meetings. The C-corp structure has a predetermined framework consisting of directors, officers, and shareholders.
- Ownership Structure: Ownership in a C corporation revolves around shares that can be bought and sold. In contrast, an LLC's ownership typically begins with its founding members. Nevertheless, an LLC's Operating Agreement can outline how ownership will be assessed and modified.
Choosing the right structure is the first and one of the most important steps towards starting your business. It may seem confusing right now, but it doesn’t have to be!
At Incunit, our experts can help you make the right decision, and form your LLC or C corporation within days. All you have to do is click here to get started!
