When a person starts a business, they need to make many important decisions. Deciding on how their business will be structured is one of the most critical decisions they have to make.
There are four types of business structures in the United States: sole proprietorships, partnerships, limited liability companies, and corporations.
Here’s a quick guide to the differences between two of the most popular business structures, LLCs and C corps.
The following guide is a complete comparison of C Corporation vs LLC that discusses all primary differences between the two, including the tax implications, what you can expect to pay in taxes with each type, and the compliance requirements of each.
Please read this guide until the end; it will surely help you decide which business structure suits your needs.
C Corporation vs LLC: A Comprehensive Guide for Entrepreneurs in 2022
- 1 What is an LLC?
- 2 What is a Corporation?
- 3 What is a C Corporation?
- 4 Primary Differences Between LLC and C Corporation
- 5 C Corporation vs LLC: Ownership
- 6 C Corporation vs LLC: Taxation
- 7 C Corporation vs LLC: Which Business Structure is Right for your Business?
- 8 Conclusion
What is an LLC?
An LLC stands for limited liability company, a legal business structure recognized by the state of Wyoming in 1977.
It is relatively new and one of the most popular business structures in the United States. In fact, 35% of US businesses register their business as an LLC.
It is one of the most popular business structures in the United States because of its unparalleled benefits such as limited liability, easy to set up with less paperwork and legal formalities, inexpensive and various tax benefits.
What is a Corporation?
Corporations are popular business structures, just like limited liability companies.
It is a legal business entity owned by its shareholders. The shareholders elect a board of directors to oversee the corporation’s activities.
The corporation is responsible for the actions and finances of the business, not the shareholders. Some corporations are for-profit or operate for commercial reasons. Others exist as not-for-profit organizations, which serve to benefit society.
What is a C Corporation?
The term “C corporation” or “C corp” means “corporation.” C corporations pay income taxes under chapter C of the Internal Revenue Code, hence the “C” in their names.
Primary Differences Between LLC and C Corporation
LLCs and corporations are a lot alike. They’re both types of business structures that afford their owners certain legal protections. They can be owned by US and non-US individuals, and they allow you to have unlimited owners too.
But in terms of ownership and taxation, the two are very different from each other, which I will tell you about in this guide.
C Corporation vs LLC: Ownership
We will begin by comparing LLCs and corporations based on ownership differences.
A corporation is a company that is owned and run by its shareholders. The corporation can distribute shares of stock to investors who have an interest in the company. The shareholders are the business owners.
They can buy or sell shares of stock. A corporation also exists separately from its shareholders. This means that a corporation remains in existence even when a shareholder leaves the company.
Limited Liability Company (LLC)
An LLC can transfer ownership to any of its members, no matter what amount each one invested. Its operating agreement—its internal rules and regulations—can specify that all members are entitled to an equal share of the company’s profits.
This is more flexible than business structures that only allow specific percentages of profit to be distributed.
C Corporation vs LLC: Taxation
One major difference between LLCs and C Corps is how they’re taxed, which every business person should understand.
Businesses that register with C Corporation have to experience double taxation.
Double taxation means a C-corp pays corporate taxes on the profits it generates from selling its goods or services, and if that money is then split up and paid to shareholders, the individual shareholders pay taxes on those dividends too. That’s because the government taxes corporate income at both levels—on the company and again on the individual shareholder who owns stock in the company.
Here’s an example of double taxation: Let’s say a C-corp earns $100, pays $30 in taxes, and distributes $70 to shareholders as dividends. The corporate tax rate is 30 percent, so the corporation will pay another $30 in taxes on its profits, but the shareholders will pay at their individual tax rates.
Form 1120, which is used to file and pay the corporate tax, has a deadline of April 15th. The corporate tax rate is currently 21%.
Limited Liability Company (LLC)
A limited liability company offers more tax benefits than any other business structure.
An LLC is treated as a pass-through entity for income tax purposes, which means that the LLC does not pay income tax on its own. Instead, it “passes through” any revenue to the owners, who pay taxes on their money.
However, since an LLC is a “pass-through” entity, you can choose to be taxed as a sole proprietor, S corporation, or C corporation. This gives you more flexibility than corporations. They are typically double-taxed—meaning that they’re taxed once as a company and again at the individual level on company profits when distributed as dividends.
C Corporation vs LLC: Which Business Structure is Right for your Business?
LLCs, give you a lot of flexibility. You can decide how much ownership your partners should have and choose how you want to be taxed. You have that option if you’d like to be taxed as a C-Corporation. Or, if you’d like to go the S-Corp, that’s an option too.
A limited liability company is the best option for business owners who do not need to raise capital from outside investors or take their company public.
If you are thinking of forming an LLC without any hassle of paperwork and legal formalities, you are at the right place.
Micahguru Formation is a U.S. incorporation company that helps founders and entrepreneurs globally to launch and manage their U.S. businesses remotely.
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