LLC vs. C Corporation: What's the difference?
LLCs and C Corporations are two of the most common business entities available to entrepreneurs in the US. If you're ready to launch a business, you may not be sure what each of these business structures are or what it means for you as a founder.
The type of company you choose to incorporate is one of the most important decisions you'll make in the early stages. In this article, we'll walk you through the key differences between LLCs and C Corporations and explain some situations where each one might make more sense for a particular business.
In this article:
- LLC vs. C Corporation: The basics
- LLC vs. C Corporation: Comparison Overview
- Bottom line: how to choose
Looking for a quick recommendation? Check out our LLC vs. C-Corp quiz to see which option is right for you. We'll even help you decide which state to incorporate in!
LLC vs. C Corporation: The basics
Both LLCs and C Corporations allow founders and their partners to limit their responsibility to company debts and liabilities. This means that the debts and liabilities of the business are separate from those of the members, or owners, on a personal level.
To illustrate what this means, let's take an everyday example. Imagine you get into a fender bender on the way to work. If the accident was your fault, the other driver could sue you for damages.
Without an LLC, C-Corp, or other legal company, damages related to your business would work the same way. Since there's no "business" to sue, the other party would only be able to sue you personally. Your home, car, and other assets could be on the line.
Once you incorporate a business, the business' activities are considered separately from your personal activities. If the company is sued, only the company's assets can be taken to pay off debts, settlements, or judgements against you. This is a critical layer of protection for any founder. While there are some legal differences between the two business structures, LLCs and C-Corps generally work similarly when it comes to liability protection.
With both options offering limited liability, the decision between an LLC and C-Corp comes down to other factors. These include the ownership and management structure of your business, your personal and company goals, and your potential tax obligations.
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. While the LLC protects the members from liability, income is still treated as the income of the individual members — not the income of the business itself. Note that LLCs still have the option to file taxes as corporations if they elect to file form 2553.
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. Let's take a closer look at the distinction between an LLC and a C-Corp.
LLC vs. C Corporation: Overview
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 from taxes and regulations to management and ownership structure. The chart below lays out some of the most important differences.
Once you choose between an LLC and C-Corp, the next step is deciding which state to incorporate the business in. While we generally recommend Wyoming for LLCs and Delaware for C-Corps, there are naturally benefits and drawbacks to both. Click here to learn more about the pros and cons of incorporating in Wyoming and Delaware.
The bottom line
Both LLCs and C Corporations have their unique advantages and disadvantages, so it’s important to understand how these apply to your business goals.
LLCs are generally a great option for small businesses because they are more flexible, meaning you can make your own rules and tailor your entity to suit the intricacies of your business. You also won't have to worry about corporate tax or regulatory requirements that are applied to C-Corps. LLCs are also ideal for ecommerce businesses.
LLCs don’t have shares, so you won’t be able to issue stock or go public. Still, many well-known companies are LLCs, including Basecamp and Mailchimp. Clearly, you can still grow an LLC as long as you're OK with not issuing equity.
If you’re a tech or startup founder looking to raise capital from investors, 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, our team is here to guide you through the process. Hit the link below to start your incorporation today or take our LLC vs. C-Corp quiz to make an informed decision for your business.