Wondering If Your Business Should Be An LLC Or C-Corp?
LLC vs C-Corp – do you know the difference between the two?
Keep reading because this post will take a deep dive into LLC vs C-Corp, and also discuss which might be best for your business.
Today, we will be discussing the key differences and similarities between an LLC vs C-Corp.
Especially, the tax differences, and what you could expect to pay in taxes with each business entity type.
We’ll also explain the compliance requirements of each and how you can decide which is best for your small business.
To be fully transparent here, we are not lawyers and by no means giving you legal advice.
But we are licensed CPAs, and we will break down the gist of the legal jargon and especially focus on the tax items so you can avoid paying too much in taxes.
And as we all know (or should know), how you decide to structure your business will significantly impact the amount of taxes you pay.
After all, taxes are your biggest expense!
All of which and more we are going to explain to you in this post!
So let’s dive in.
Key Differences Between LLC Vs C-Corp
This is probably the single most important difference to understand and you should be aware of.
C-Corporations experience double taxation.
Double taxation means the C-Corporation pays taxes on its income and when you take money out, like a dividend, you, as the shareholder, are also taxed.
So with a C-Corporation, you are paying taxes twice on the same income.
Did you catch that?
The income is first taxed through the business with corporate income taxes. This income already includes the dividends and money you took out of the business.
Then it’s taxed again on your personal return for any amount you took out of the business as a dividend, or in other words, a distribution.
The current corporate tax rate is 21%, and the Federal deadline to file and pay is April 15th on Form 1120.
And the individual tax rate on corporate income would depend on your personal tax rate and would consider your income from all sources.
On the other hand, LLCs only pay tax on the individual level as a default.
This means, the LLC entity does not pay taxes directly (unlike a C-Corp), but the income earned through the LLC is passed to the owner where taxes are assessed.
Most LLCs are single-member. And for those single-member LLCs‘, their tax returns are due April 15th.
For multi-member LLCs or S-Corp LLCs, those tax returns are due March 15th.
This is called pass-through taxation.
However, as an LLC owner, you can decide how you want your LLC to be taxed. So you can be taxed as a:
- sole proprietor,
- S Corporation, and
- even a C corporation
So as you can tell, an LLC offers you more flexibility in taxation. Whereas a corporation, not so much. You’re going to be double taxed.
By the way, you can read this post next to learn more about the tax benefits of LLC.
Another difference is how LLCs and C Corporations are formed.
There is a lot more administrative work in forming a corporation.
a. Corporations are required to have articles of incorporation
This is simply a set of documents that are filed with the state to legally document the formation of a corporation.
These are a set of rules and regulations adopted by a corporation.
c. Elect a board of directors
These are the people who represent the shareholders of a corporation.
d. Hold a board meeting
This is a formal meeting with the board of directors to discuss performance and address major company issues.
e. Hold a shareholders’ meeting
This is a formal meeting with the shareholders of the company to vote on specific issues and review finances.
Both board and shareholders meetings are required to occur at least once a year.
And, details of those meetings must be kept in the meeting minutes in order to maintain corporate status.
f. Issue stock and shares in the company
This will be based on what was invested as capital in the corporation.
Well, that’s a lot.
In fact, most corporations seek the help of an attorney to form their corporation.
On the other hand, forming an LLC is much simpler.
a. You’d need to have your articles of organization.
This document is similar to the articles of incorporation for corporations.
b. Have an operating agreement (similar to bylaws)
This document outlines how your LLC will operate.
It’s important to note that both the operating agreement and bylaws (and even the articles of incorporation and organization) are legally binding documents.
It is very important to understand what is being included in these documents because they could come back and bind you later on, if or when legal or even tax issues arise.
The last difference we want to touch on is the ownership of each.
A corporation can issue shares of stock and sell percentages of the business to its owners, or shareholders.
These shareholders can buy or sell their shares for more or less ownership in the company.
A corporation also exists in perpetuity separate from its shareholders. This means that a corporation remains in existence even when a shareholder leaves the company.
A Limited Liability Company (LLC) has the freedom to distribute its ownership stake to its members without regard to a member’s financial contribution to the LLC.
For example, a member of an LLC may not have invested as much capital as another member.
However, an LLC’s operating agreement could specify that all members receive an equal share of the profits anyway.
This creates more flexibility when establishing the ownership of the company.
We’ve talked a lot about the difference between an LLC and a corporation, but what about the similarities?
Similarities Between LLC Vs C-Corp
For one, both LLCs and corporations offer their owners limited liability.
For LLCs, this is literally a part of its name – Limited Liability Company.
But what this means is that the owners of the LLC or corporation are not personally liable for the company’s debts or liabilities.
So basically, if someone sues your LLC or Corporation, they cannot go after your personal assets, like your house or personal funds.
Another similarity is that LLCs and corporations can be owned by US and non-US individuals.
And this is not the case for S-Corporations.
LLCs and corporations also allow you to have unlimited owners. This could be helpful if you’re planning on starting the next Fortune 500 company.
And this brings us to our next point.
Which One Is Right For Your Business?
So again, we’re just CPAs and can only really speak from that perspective.
For most business owners, LLC tends to be the better choice.
LLCs are the definition of flexibility. They give you the choice of how you’d want your partners’ ownership percentage is to be allocated.
Not to mention, you can choose how you want to be taxed.
So if for some reason you want to be double-taxed like a C-Corporation, you can. Or you can go the S-Corp or sole proprietor route.
Generally speaking, unless you are seeking investors or planning on going public with your company, LLC is usually the go-to.
They are simpler to set up and easier to maintain.
Now if you’re looking for more sound advice regarding your business financial aspect, go ahead and talk to one of our accounting consultants today.
Or, you can also head over to our website and check out our financial advisory services.