When starting a business, it’s important to choose the right business structure to suit your needs — and one of the biggest questions that most new business owners have is whether it’s better to go with an LLC vs. C Corporation. There are various advantages and complexities to each type of business entity. There is no simple answer to the C Corporation vs. LLC debate — but in general, if you evaluate your choice based on these criteria, you will hopefully gain clarity on which business entity is right for you.
Here are a few questions to consider as you decide between a C Corporation vs. LLC:
How Many People Will Own the Business?
The LLC is one of the most popular forms of business entity for solopreneurs and small businesses, because it can be created even for a single owner. The single-member LLC is a great option if you’re self-employed and don’t have any business partners. LLCs are perfect if you just want a simple business structure that will give you the personal liability protections, possible tax advantages, and public credibility that comes from doing business as a formal legal business entity.
If you want to have multiple owners or business partners, you can still use an LLC for your business partnership — the LLC has flexible management options that allow multiple owners (“members”) to make decisions for the business. But if you really want your business to grow and have multiple owners and stockholders, the C Corporation is usually the best choice. Read on to find out why.
Do You Want to “Go Public” Someday?
If you want to be a publicly traded company with an IPO (Initial Public Offering), you need to set up a C Corporation. C Corporations have shares of stock that can be bought and sold, and C Corporations also make it possible for investors to help your business grow with venture capital funding. If you want your business to become a major corporation with big growth objectives, the C Corporation is a better structure than the LLC.
However, as with all things in business and in life, there are certain complications that go with growth — so you have still more considerations to make.
What Level of Reporting and Compliance Requirements Are You Prepared to Deal With?
If you want to start a C Corporation, you may have the capacity for higher levels of business growth — but you also need to be prepared for the higher expectations of compliance and reporting requirements that go with that. C Corporations have to comply with a variety of business filings, formalities, legal rules and compliance requirements, such as having an annual meeting of stockholders, assigning officers, appointing a Board of Directors and dealing with the various business filing deadlines that go with that.
Of course, even a simple single-member LLC will still have business filing deadlines and regulatory compliance issues to deal with, but there is a greater level of complexity for C Corporations. However, if you want the big rewards that go with building a larger company, you need to be prepared to handle the paperwork along the way.
How Simple or Complex Do You Want Your Taxes To Be?
Paying taxes is another fact of life for business owners, and the taxation of business income is treated differently by the IRS depending on what type of business structure you have.
If you use an LLC for your business, the LLC does not pay taxes on its own. Instead, it is treated as a “pass-through” entity for tax purposes — the business income just “passes through” directly to the business owner and is reported on the business owner’s personal income tax return.
(Of course, there are some additional complexities involved with this, depending on if your LLC files as an S Corporation. But even then, your LLC does not owe or pay taxes as a separate entity; the income just flows through to the owner or owner of the company, who then has to report and pay tax on that income via their personal tax return.)
C Corporations are treated differently from a tax perspective. A C Corporation is required to pay corporate income taxes — and then any income that gets paid to employees or paid to shareholders as dividends is also taxed a second time when those individuals pay their taxes. This is also known as “double taxation.” The new tax law that took effect on Jan. 1, 2018, has reduced the corporate income tax rate significantly, but this is still an issue that C Corporation founders and owners need to be aware of. If you choose an LLC instead of a C Corporation, your tax filing and tax burden will likely be simpler.
However, just like with the heightened regulatory requirements and complexities of a C Corporation vs. LLC, if you want to pursue the big growth potential that comes from bringing on venture capital investors and issuing shares of stock, you should not let this discourage you. The C Corporation might be the right choice if that’s the kind of business you want to build and the level of growth you want to pursue. Even if the tax and regulatory requirements are more complicated, the potential rewards are bigger too.
Bottom Line: There are advantages to each business entity. When you’re dealing with the question of C Corporation vs. LLC, don’t assume that there’s one “right” or “better” choice of business structure. It all depends on what you want your business to become. If you’re happy with a smaller, simpler business, the LLC is probably the right choice. But if you have big goals for taking on investors, going public, issuing shares of stock and becoming a major company, then the C Corporation is probably the best choice.
Are you ready to start a business, form an LLC or C Corporation, or reorganize your current business structure? Talk to Incfile today! Our incorporation experts can help you evaluate your options with state-specific advice.