LLC or C Corp

The Differences Between a Limited Liability Company and a C-corporation

It is quite difficult to confuse a Limited Liability Company (LLC) with a C-corporation. The two have many similarities and yet stark differences. If used effectively the LLC can potentially combine the benefit of a C-corporation with the benefit of a S-corporation. The result is a hybrid incorporation option that can be beneficial to an individual, a group of start up business investors, or a real estate investment group.

Difference #1: Uncle Sam’s Share

The main difference between LLCs and C-corporations is the way in which the business will be taxed. The profits of a C-corporation are taxed prior to distributing the profits to the business’ shareholders. Once the company has allocated the profits to the shareholders, taxes must again be taxed at the individual level or however the ownership is held.

An LLC that has been set-up as a partnership for tax purposes has pass-through taxation. The LLC is not taxed as a separate legal entity.  The Owners, known as Members, are responsible for paying taxes on the profits they receive. Allocated profits are to be claimed as personal income. This prevents double taxation of the profits.  Again, this is if the units of ownership are held by an individual.

Difference #2: Near Anonymous Incorporation

In some states, the members or owner of a LLC are not required to disclose their names and contact information on public record. This provides a high level of privacy for the people behind the company and another layer of protection from creditors.

Ultimately, the purpose of the LLC is to protect the business members from all or some liability for debts and acts of the LLC. The amount of protection provided will depend on the particular state the company is incorporated in. Delaware and Nevada are two states that have structured their laws to protect the owners and members of entities formed in their states. Not all states extend such protections.

There are many states in the U.S. that do not have detailed governance for the operation, dissolution, etc. of a LLC. For further protection partners and company members should have a detailed operating agreement.

The operating agreement can include the responsibilities of each of the positions that will be established within the LLC. The document can also provide extensive protections to the personal assets of all company members. The protections must be within the bounds of state law. Most state governmental bodies will provide a standard operating agreement for partners or members to adopt.

Difference #3: A Buffet of Taxing Options

The LLC is far more flexible than the C-corporation as it can choose to be taxed as a sole proprietor, partnership, S-corporation, or C-corporation.  This is accomplish when filling out the IRS form SS-4 to receive the Employer Identification Number.

Difference #4: ‘Small Business Size’ Registering and Licensing Fees

A limited liability company provides a leaner and more flexible incorporation option for small businesses and can be far cheaper to operate. Some states, including Delaware, allow LLCs to be set up with just one person. Delaware also charges a comparably low, flat fee for yearly business taxes.

Some states may charge a franchise tax. The charge is exacted for the privilege of being guaranteed limited liability. Texas charges a franchise tax of as much as $300 per year.

Difference #5: (Downside) Money Problems and Limited Future

The LLC is not a perfect form of incorporation. There are downsides to incorporating under this business type. A major problem with the model is the difficulty to raise financial capital. Venture capitalists prefer the C-corporation model especially for businesses with large IPO potential.

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