What is the Difference Between a C-Corp and an LLC?
There are several significant differences between a C-Corp, or C-Corporation, and an LLC, or limited liability corporation. When you are choosing to incorporate your business and file as one or the other, you should select the option that makes sense for your company in the present but that can also accommodate any future growth of your company.
Are There Any Similarities between a C-Corp and an LLC?
Yes, in both cases, owners have some degree of limited liability. In a C-Corp, the business is legally an independent entity. In the case of poor business practices, the business itself can be sued and penalized but the owners and shareholders as individuals cannot. The same is true for an LLC. The business itself may be sued but the owner or partners cannot, for example, lose their personal property in a lawsuit.
Additionally, both LLCs and C-Corps have no restrictions as to the number of individuals who can be owners in the companies. This contrasts with S-Corps.
What Are the Major Differences between a C-Corp and an LLC?
Despite these similarities, C-Corps and LLCs have many significant differences.
- In C-Corps, revenue may be taxed twice: once as it comes into the C-Corp and a second time as profits are distributed to shareholders.
- C-Corps tend to be the preferred option for developing business that anticipate much growth. This is because C-Corps allow for owners and shareholders to own different types of stock, which means they have the potential for the payment of multiple types of dividends. This makes C-Corps, rather than LLCs, particularly attractive to venture capitalists who desire the prospect of potentially high dividends.
- C-Corps are legally allowed to retain and accumulate profits from year to year, within specified limits.
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C-Corporations (Standard Corporations) and Limited Liability Companies (LLCs) are the two most common types of business entities. If you’re having difficulty deciding which is the best choice for your business, it may be helpful to do an in-depth, side-by-side comparison of the four areas in which they differ the most.
- Ownership and Longevity
In a C-Corp, it’s much easier to change ownership. All that’s required is to sell stock to current or new shareholders. Plus, because corporations are considered separate entities from owners, they can outlive their founders.
LLCs, on the other hand, are bound by the terms of their operating agreements where specific terms for transfer of ownership are clearly outlined.
- Taxation
C-Corps are taxed twice, once at the corporate level and again on individual shareholder income tax returns.
LLCs are only taxed on the individual level. All profits and losses are reported on each owner’s individual income tax returns.
- Dividends
C-Corp ownership is represented through stock holdings which can produce dividends. It is up to the board of directors to decide whether to issue the dividends to stockholders or to reinvest the company profits in the business.
LLC ownership is not represented through stocks, so there are no dividends to distribute. However, members may choose to redistribute profits in accordance with the operating agreement.
- Management and Control
C-Corps operate under strict rules and regulations outlined in formal bylaws which have little flexibility. A board of directors makes all business decisions and this board can only be dissolved in very specific circumstances.
In an LLC members can choose to elect a group of managers to make operational decisions or the members/owners themselves can serve as the managers and decision makers for the company.
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