The many types of business structures and the associated nomenclature can quickly become confusing. The differences among these categorical designations have important implications for taxes, liability and business operations, so understanding the nuances is important. Here we compare two of the most common business structures: the C-corporation or “C-corp” and the limited liability company or “LLC.”
LLC and C-Corp Defined
What Is an LLC?
A limited liability company balances the relative ease and flexibility of a partnership or sole proprietorship structure with the increased risk protection of a corporate structure. Like corporate shareholders, LLC owners (known as “members”) enjoy limited liability, meaning personal liability to the company includes only what members have invested and does not extend beyond it to cover corporate losses or debts.
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By default, members of an LLC pay taxes as a share of personal income just as owners of a sole proprietorship or general partnership would—this is often referred to as a “pass-through” tax structure. An LLC can elect to be taxed as a C-corp or an S-corp if it meets certain requirements. Many small business owners choose LLCs for their simplicity and flexibility.
What Is a Corporation?
A corporation must be composed of shareholders, directors and officers. As a legal entity, a corporation is distinct from its shareholders, and shareholders enjoy the same personal liability protection that members of an LLC receive. Corporations are subject to a number of legal requirements and “corporate formalities” to which other types of businesses are not, though the specifics of these depend on the type of corporation.
What Is a C-Corp?
Unlike an LLC or corporation, a C-corp is not a type of business entity. C-corp is a tax classification that is available to both corporations and LLCs, though it is more typically used by corporations. The C-corp is named for the subchapter of the Internal Revenue Code—subchapter “C”—under which its tax designation is described.
A C-corp pays corporate income tax using IRS Form 1120. Shareholders then pay taxes on personal income for any gains realized from dividends paid by the C-corp or on gains made from sale of C-corp stock. This system is referred to as “double taxation” and has traditionally been viewed as the cost of the corporation’s limited liability advantages. Today, businesses can also achieve limited liability through LLC formation or election of S-corp status.
C-corps have no broad restrictions on who can own shares. Other businesses or entities both in and outside the United States can have ownership and there is also no limit to the total number of shareholders. Corporations taxed as C-corps tend to be the best business structures for raising large amounts of capital from a wide variety of investors.
LLC Pros and Cons
Some of the most important advantages and disadvantages of LLCs revolve around taxes, stock and liability:
C-Corp Pros and Cons
The most important advantages and disadvantages of C-corps focus on the same principles as LLCs.
Choosing Between an LLC and a C-Corp
While there’s no substitute for advice from licensed legal and tax professionals, an overview of the key similarities and differences between these business structures can help future owners ask the right questions about what type of business to form.
LLC and C-Corp Comparison Chart
Alternatives To Consider
Although they are each quite popular, C-corps and LLCs are only two of several possible business designations. Here are some of the other options business owners might consider:
S-Corp
This tax designation can be elected by corporations—and some LLCs—that qualify in order to receive special treatment. Unlike C-corps, S-corps are exempt from a federal corporate income tax. Instead, much like revenue from LLCs, partnerships and sole proprietorships, revenue from S-corp dividends or gains is taxed only at the individual level. If S-corp shareholders can meet certain criteria, corporate losses are able to offset income from other sources when written off on personal income statements.
S-corps enjoy the same protection from liability offered by corporation status and maintain an independent “life” from owners. Like the LLC, this designation was created to make limited liability protections—which have historically been associated with big corporations—available to smaller businesses. For a corporation to qualify for S-corp status, it can’t exceed more than 100 shareholders, effectively ruling out corporations that want to go public. Ownership of an S-corp is restricted for the most part to individual U.S. citizens or permanent residents.
For an LLC, the main advantage of S-corp taxation is that it may save money on self-employment taxes. This is because owners of an S-corp can be company employees. They must pay themselves a reasonable salary, but additional company earnings are considered distributions, which are not subject to Medicare and Social Security taxes. Under the default LLC tax structure, owners are self-employed and must pay self-employment taxes on all company profit.
Sole Proprietorship
If a legal distinction between business and owner and the protections the legal separation of entity can afford are not important or desirable to a business founder, sole proprietorship can offer an appropriate alternative, provided specific circumstances exist. A sole proprietorship is the simplest structure for a one-owner business. It gives the owner few regulatory burdens and a high degree of control and flexibility, but without a distinct business entity, there’s no legal difference between the business’s assets, debts and other liabilities and those of the owner. Unlike a corporation, this means the owner is on the hook personally for any legal or financial failures of the business.
Partnership
Partnerships are similar to sole proprietorships when it comes to liability or taxes. A partner in a general partnership, like a sole proprietor, reports a share of income, expenses, credits, profits and losses on personal tax returns and thus pays a personal income tax rate and assumes the business’s liability as personal liability. Like sole proprietors, partners must pay a self-employment tax where applicable on all gains without the benefit of separately categorized and possibly untaxed distributions. A limited partnership (LP) or limited liability partnership (LLP) may be an option depending on the industry and other specifics.
Frequently Asked Questions
What’s the difference between a company and a corporation?
A corporation is a specific type of business entity, formed by filing Articles of Incorporation with the state. Corporations have a uniform management structure, limited liability for shareholders and specific tax filing categories. “Company” is often used generically to refer to any business, as in “My brother and I started our own company.” “Company” can also be used instead of “Inc.” or “Co.” to identify a business as a corporation, as in “The Coca-Cola Company.”
How do I set up an LLC?
In order to establish an LLC, founders must file Articles of Organization with whatever agency manages business registration in their state(s). These are different from the Articles of Incorporation filed by a corporation. Just like corporations, LLCs must designate a registered agent. Check out this article to learn more about the many requirements for starting a business.
How do I set up a C-corp?
You form a c-corp by filing Articles of Incorporation with the state agency in charge of corporate filing. These articles include the number of authorized shares along with other basic information about the corporation and its incorporating entities. The corporation-to-be must designate a registered agent and reserve a name. Once formed, your new corporation will automatically be taxed as a C-corp. If you have formed an LLC, you can elect C-corp taxation by filing IRS Form 8832.
Can a business change from an LLC to a corporation, or vice-versa?
It’s not uncommon for businesses to begin as an LLC and then elect to be taxed as a C- or S-corp or to fully transition a company structure to a corporate one. Many business owners appreciate the flexibility an LLC affords early on but eventually turn to a corporate structure for its advantages in equity financing. It’s also possible, though less common, to turn a corporation into an LLC. The process for doing this varies from state to state.
What are the differences between a C-corp and an S corporation (S-corp)?
Surprisingly, there aren’t that many differences. For example, S-corps begin their existence as C-corps. The conversion to an S-corp occurs by filing IRS Form 2553, Election by a Small Business Corporation, with the IRS, by March 15 of the year that you wish to change your company’s designation to an S-corp. The main differences between C-corps and S-corps have to due with taxes. The profits made through an S-corp are not double-taxed like those made through a C-corp because the S-corp is treated similarly to a partnership or sole proprietorship. However, C-corps have more flexibility around shareholders and the selling of stock, along with the taxes related to certain benefits like health and life insurance.
