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 leadership of your business, your personal and company goals, and your potential tax obligations before deciding on a business classification.
A Limited Liability Company (LLC) is a business structure formed by members (rather than stockholders) who all pay taxes as a share of personal income, often referred to as a “pass-through” tax structure.
When forming an LLC, owners create an Operating Agreement, essentially a contract specifying how the business will be run and how costs and profits will be shared amongst members. LLC owners are called members and each owns a percentage or “membership interest” in the business. As long as all parties agree to the terms, the structure of an LLC is at the founders’ discretion. Because of this, many small business owners choose LLCs because of their simplicity and flexibility.
- Ownership represented by Membership Units: Members. Not shareholders;
- Do not issue stocks;
- "Pass-through" tax structure;
- Membership interest among the members is set up in the Operating Agreement;
- It has members and MUST distribute the ownership among them.
A C-Corporation (C-Corp) is a legal entity known for its “double taxation,” where the C-Corp pays corporate income taxes and shareholders pay personal income taxes based on gains made from dividends or the sale of C-Corp stock.
C-Corps have no broad restrictions on who can own shares. Other businesses or entities both in and outside the United States can have ownership with no limit to the total number of shareholders.
Ownership in a C-Corp is represented by stock certificates that grant your business the ability to raise capital by issuing stock. The individuals who own stock certificates are called shareholders.
- Owners are referred to as Shareholders;
- Issue stock/share certificates;
- Taxed as a separate legal entity;
- Must have a Board of Directors and officer positions (CEO, CFO, President, Secretary).
LLC X Corporation
The choice can be driven by many factors like tax obligations, corporate governance, the need to raise venture capital or issue stock to employees, or other enterprise objectives.
A corporation is different from an LLC as the owners are known as “shareholders” whose ownership percentages reflect the number of shares of company stock they own. C-Corps tend to be the best business structure for raising large amounts of capital from a wide variety of investors.
It’s always important to consider your long and short-term goals before choosing between an LLC and a C-Corp. Both offer different advantages and disadvantages based on taxation, liabilities, issuance of stock, regulation, and more.
Small e-commerce companies are usually better off as LLCs, while tech startups that are seeking to raise capital are better served as C Corps. The information provided should help you make an informed and confident decision, whichever you choose.