Most entrepreneurs looking to start a cap table operate their businesses as a Limited Liability Company (LLC) or a Corporation. However, according to Internal Revenue Service statistics, LLC filings, compared to C-Corp, are growing at a much higher rate of approximately 4.2% annually. Therefore, it is crucial to understand how LLC and C-Corp are distinct since their differences are essential in taxes, business operation, and liability.
Choosing between LLC and C- Corp may not be an easy task. This article is meant to help you decide your better choice between the two.
What is an LLC?
In the United States, a Limited Liability Company is a business entity that is privately owned and still has elements of partnership, sole proprietorship, and corporations.
They enjoy flow-taxation as partnerships or sole proprietors while maintaining limited liability like corporations. Flow-taxation allows profits and losses to be reflected on the owner’s tax return, making filling the tax process simpler in LLC.
A Limited Liability Company may have one or many members, such as foreign businesses and other LLCs or Corporations. Personal assets of the owner or members are protected by ensuring their liability for the entity’s debts and obligations do not exceed their investment. Therefore, members’ assets cannot be used as collateral in case of a business bankruptcy or lawsuit.
In some states in the US, companies that require legal licensing, such as medical and legal companies, are not allowed to operate as LLCs. However, small businesses opt for LLCs since it is more flexible than a corporation.
What is a C-Corp?
C-Corp is the default variety of a corporation. Its shareholders pay tax from their income gained at the individual level or dividends from the corporation, leading to double taxation. C-Corp is a hierarchical organization where shareholders have divided power. It is suitable for large corporations due to its complex nature.
Unlike corporations and LLCs, C-Corp is not a business entity but a tax classification for both LLCs and corporations. It is named for the Internal Revenue Code, ‘Chapter C,’ which describes C-Corp tax designation.
Does Your Business Need an LLC or C-Corp?
First, let us discuss C-Corp versus an LLC:
- C-Corp undergoes corporate income tax, while LLC owners have pass-through and C- Corp taxation as options.
- C-Corp is a tax classification structure, while LLC is a business entity.
- C-Corp is complex in regulatory compliance and reporting and is suitable for larger businesses. At the same time, LLC is flexible and can be quickly adopted by small businesses.
- C-Corp has a hierarchical type of ownership where power is divided between stakeholders, directors, and officers. At the same time, an LLC can be established with just a single person.
- C-Corp attracts venture capitalists who make significant investments in the business, while LLCs are private entities focused on the business’s growth.
Choosing the best business structure may seem like a hard decision. However, when you understand your options and their implications, the journey might end before it begins.
The Bottom Line
Knowing the differences between LLC vs. C-Corp is essential when you are stuck on which business structure to adopt. Understanding this difference will prepare you for their tax implications, personal liability, and how you operate your business. Contact us or visit our website for our cap table management services in LLC or C-Corp structuring and a free demo offer.