LLCs and C Corporations are two of the most common business entities available to entrepreneurs in the US. After you’ve determined why you should form a company it’s important to understand the key differences in entity type to decide which can work best for you. This is one of the most important decisions founders will make and it’s usually the first legal decision you handle by yourself. That’s why Firstbase wants to make sure you choose the right structure to support your company’s vision and goals.
This article covers the key differences between LLCs and C Corporations for anyone looking to understand both options.
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Both LLCs and C Corporations allow founders and their partners to limit their responsibility to company debts and liabilities. With both options offering limited liability, it’s important to consider how you intend to structure the ownership and management of your business, your personal and company goals, and your potential tax obligations before deciding on your entity.
A C Corporation (C-Corp) is a legal entity known for its “double taxation,” where the C Corporation pays corporate income taxes and shareholders pay personal income taxes based on gains made from dividends or the sale of C Corporation stock.
A Limited Liability Company (LLC) is a business structure formed by members (rather than shareholders) who all pay taxes as a share of personal income, often referred to as a “pass through” tax structure.
It’s always important to consider your long and short term goals before choosing between an LLC and a C Corporation. Both structures offer different advantages and disadvantages based on taxation, liabilities, issuance of stock and regulation.
Below is a helpful chart that outlines the key differences.
Along with these differences in structure between LLCs and C Corporations, founders will want to determine whether they should incorporate their LLC in Wyoming or Delaware. Both are considered advantageous states to incorporate in, but the differences should be considered.
Both LLCs and C Corporations have their unique advantages and disadvantages so it’s important to understand what is most applicable to your business goals and timeline.
LLCs are generally a great option for startups or small businesses (e-commerce, especially) because they are generally more flexible, meaning you can make your own rules and tailor your entity to suit the intricacies of your business. LLCs don’t have shares, so you won’t be able to issue stock or go public, but many well-known companies are LLCs (such as Basecamp or Mailchimp), so you can still grow considerably with this structure.
If you’re looking to raise capital from investors such as many technology startups, incorporating as a C Corporation will give you more options and the ability to issue stock and manage your capitalization table.
Whichever business entity you choose, Firstbase is here to guide you through the process.
Still need help choosing which entity is right for you? Check out our free recommendation tool to help you get started.