Here are the key differences between an LLC and a C Corp, so you can choose what's right for your business.
There are a lot of business structures, and their lingo can be confusing. Taxation, liability, and business operations are impacted by knowing the differences between these categorical designations. We’ll compare two of the most common business structures: the C-corporation and the LLC. One needs t be aware about these company registration types before opting to register a company in The UK.
LLC – What Is It?
In the United States, a limited liability company (LLC) is a business structure that combines aspects of partnerships and corporations. In the same way that partnerships and sole proprietorships benefit from the flexibility and flow-through taxation of limited liability companies, corporations maintain their limited liability status.
What Is a C Corp?
A C-corporation, often called a C corp, is a legal entity created by state law. A C-corp is an independent legal entity from its owners, meaning it can enter into contracts, incur debt, and be held liable in court. Owners of a C-corp are called shareholders and they elect a board of directors to manage the business. Shares of a C corp can be bought and sold in the open market.
C corporations, also known as private limited company in some jurisdictions, are taxed separately from their owners. This means that the business pays taxes on its profits, and then shareholders pay taxes on the dividends they receive. This is known as double taxation. Many small businesses choose to organize as S corporations to avoid this double taxation.
LLC Advantages and Disadvantages
Taxes, stock, and liability are among LLC’s most significant advantages and disadvantages:
| LLC Advantages | LLC Disadvantages |
| The pass-through taxation of corporations avoids double taxation. | Shares of stock cannot be issued in the traditional sense. Profits are instead distributed among members as personal income. |
| Owners with limited liability can only be held liable for company debts (not personally). | Investing without traditional stock options and well-defined, strictly regulated corporate structures is more difficult. |
| Fewer regulations translate to less paperwork and greater ease of satisfying business requirements at various levels of government. | It is more difficult to retain earnings since distribution shares are taxed regardless of whether cash is distributed. |
| Can elect corporation tax status and be viewed by the IRS as C-corporation or S-corporation if desired and meet certain criteria. | All company profits are subject to self-employment tax unless the company elects S-corporation or C-corporation taxation. |
| If certain requirements are met, a corporation can elect to file taxes as a C-corporation or as an S-corporation. | |
| The government does not mandate a rigid management structure, so owners can choose their preferred management style. LLCs can also have one or multiple owners. | |
| Some small business owners may require a greater degree of overall flexibility. |
C-Corp Advantages and Disadvantages
C-corporations share many of the same advantages and disadvantages as LLCs:
| C-Corp Advantages | C-Corp Disadvantages |
| All employees, shareholders, directors, and officers are covered by limited liability insurance. | Dividends and gains from shareholders are taxed twice, first under the 21% corporate income tax and then personal income. |
| Shareholders may have an unlimited number of shareholders, regardless of their country of origin or status as a corporation or entity. | Shareholders cannot write off business losses on personal income statements, as other members of other business structures can do. |
| The clearly defined ownership, management, and tax structure are excellent for equity financing and attractive to investors. | Costly and time-consuming to start and maintain compared to other business structures. |
| The tax rate for non-corporate businesses is lower than the maximum personal tax rate. | Meetings and record-keeping are more strictly regulated as part of business operations. |
| Rigid management structure with benefits for raising capital. |
Choosing Between an LLC and a C-Corp
The following comparison of the key similarities and differences between these business structures can help future owners ask the right questions about what type of business to form, especially regarding registration of company in India.
LLC and C-Corp Comparison Chart
| Formation | Articles of Organisation | Articles of Organisation(C-corp is the default tax designation for corporations) |
| Taxes: Gains | ‘Pass-through’/’ Single-layer: personal income tax only (by default—however, an LLC can elect to be taxed as a C-corporation or S-corporation) | “Double taxation”: corporate and personal incomes |
| Taxes: Losses | maybe written off on personal tax returns | and cannot be written off |
| Taxes: Filing | estimated self-employment taxes/annual tax returns | Quarterly |
| Type of Shareholders/Members | In most states: domestic and international | Everyone is eligible to join |
| Origin of Shareholders/Members | Generally: Individuals and corporations | Normally, anyone is eligible to join |
| Number of Shareholders/Members | Unlimited unless S-corp status is elected, which limits membership to 100 | Unlimited |
| Stock | cannot be issued | Multiple classes of stock can be issued |
| Retention of Earnings | More challenging; distribution shares are taxed whether or not cash is distributed | More challenging; distribution shares are taxed whether or not cash is distributed |
| Limited Liability Protections | Yes, because they are distinct entities from their members | Yes, because they are distinct entities from their shareholders |
| Equity Financing | More difficult to raise capital, and more difficult to transfer membership interests | Easy to raise capital |
Conclusion
The main difference between an LLP and a C-Corp is that an LLP is a partnership between two or more individuals, while a C-Corp is a corporation. Both have their own unique advantages and disadvantages, so choosing the right business structure for your needs is important. If you’re not sure which one is right for you, consult with a business attorney to learn more about the benefits and drawbacks of each type of business entity.
