What is the difference between an LLC and a C Corporation?
Differences
- Formation
If you want to form a C Corporation, you are required to produce Articles of Incorporation, Organizational Board Resolutions, Stock Certificates, Stock Ledger, and Bylaws. If you want to form an LLC instead, you will only need an Operating Agreement and Articles of Organization / Certificate of Formation. The LLC form was created to be suitable for small scale business owners and is therefore less demanding when it comes to mandatory paper work.
- Control
If you form a C Corporation, you have to set up a Board of Directors. The Boards of Directors are then granted responsibility for overall management, while Officers handle day-to-day business. If you form an LLC instead, you are freer to choose exactly how your company should be controlled. In the Operating Agreement you will outline how the LLC will be controlled and this is what matters. You can for instance allow the LLC to pick out a member (owner) that will be responsible for management.
- Taxes
In an LLC, profits and losses are passed through directly to the members and they will be responsible for paying taxes. In a C Corporation, the company will be taxed on its earnings and the shareholders will only be taxed when they receive dividends. The LLC form is however very flexible. If you want your LLC to be more like a C Corporation, i.e. if you want the LLC to be responsible for paying taxes instead of the owners (members), you just have to file a form with the IRS.
- Capital contributions
When an LLC is formed, the most common way for it to receive start-up assets is by having its members contributing money, property or services to the company. When a C Corporation is formed, its shares will be sold to interested buyers. These buyers will become shareholders and control the company. The stocks can be common or preferred.
Similarities
- Limited personal liability
Both the C Company and the LLC offers limited liability for its owners/members. This means that the owners can protect their personal assets. Generally speaking, owners (C Company) and members (LLC) will have no personal liability. The money you invest is the only money you risk loosing. There are however exceptions to this general rule, e.g. if a member/owner does something illegal. (You should also be aware that some banks might ask you to be personally responsible for loans in order to lend you money for your company.)
- Unlimited number of members
Both the C Corporation and the LLC can have an unlimited number of owners/members. This distinguishes them from entities such as the S Corporation where only a limited number of owners are allowed.
What is best, LLC or C Corporation?
It is impossible to answer that question without knowing anything about your particular business. Generally speaking, the LLC is more suitable for small-scale businesses. It was designed to be a limited liability alternative to the traditional partnership. The LLC is more similar to a partnership when it comes to taxes and day-to-day flexibility of management.
