When forming a business, entrepreneurs can select from several legal business structures. Two of the most commonly chosen are limited liability company (LLC) and C corporation (C corp). Though both options provide legal liability protection for business owners, incorporation offers stronger legal protection.
C Corp Versus LLC: What’s the Difference?
An LLC is not a form of incorporation; it’s a hybrid business entity. An LLC provides some liability protection to business owners while maintaining the simple management structure of a sole proprietorship. LLCs have a pass-through tax structure by default, where business owners—called members—report profits and losses on their individual tax returns instead of filing taxes twice (once as a business entity, then again on personal income taxes).
A C corp is a tax classification that both LLCs and incorporated businesses can elect. A C corp offers stronger liability protection than a default LLC, since personal and business assets are, legally, completely separated. Business owners of C corps are subject to double taxation—being taxed as an entity and a second time on personal income—unlike LLCs.
Which Is Better: LLC or C Corp?
Since each business has its own needs and goals, there is no right answer. Business owners should examine their potential liabilities, taxes, and other factors to make the appropriate choice.
LLC Pros and Cons
LLCs provide flexibility without many legal requirements while still offering some liability protection. Though situations vary from business to business, there are benefits and drawbacks of an LLC, including:
Pros:
- Limited liability for owners, so personal assets—like a house or car—are not jeopardized in case of litigation.
- No double taxation since LLCs have pass-through taxation.
- Flexibility with tax status elections. Some LLCs elect to be taxed as an S corp.
- May have more than one owner and can remain privately owned.
- IRS guidelines aren’t as strict, making legal management of the company simpler.
Cons:
- Owners must pay additional self-employment tax, unless they elect for the business to be taxed as a C corp or S corp.
- The business cannot issue stocks.
- It may be more challenging to sign investors.
C Corp Pros and Cons
A C corp comes with more legal requirements related to meetings, record-keeping, and filing than an LLC. The trade-off is that incorporation offers stronger liability protection. In general benefits and drawbacks of a C corp include the following:
Pros:
- Shareholders, employees, directors, and officers all have liability protection.
- No restrictions on the number of shareholders, their country of origin, or corporate status.
- More attractive to investors, especially traditional investors like banks and venture capitalists.
- Clearly defined management structure with strong documentation.
Cons:
- Double taxation in the form of corporate tax followed by personal income tax.
- More complicated and expensive to form and manage than an LLC.
- Shareholders can’t write off business losses on personal income returns.
- Stringent regulations for management and operation.
Can an LLC File as a C Corp?
Yes! LLCs are considered pass-through entities by the Internal Revenue Service (IRS) by default, which means that owners’ income is reported on their personal tax returns. The entity itself does not have to pay a separate corporate tax.
However, LLC members may elect to be taxed as a C corp by filing Form 8832 with the IRS. The business is then subject to the standard federal corporate tax in addition to any local and state corporate taxes.
Why Should an LLC Choose to File as a C Corp
There are a few reasons LLC business owners may elect to be taxed as a C corp. First, many investors are hesitant to invest in unincorporated partnerships or sole proprietorships. If a business needs to obtain venture capital or bank loans, a C corp tax structure may be beneficial.
Second, LLC members in a business set up to be taxed as the default pass-through structure cannot be employees of the company, which leads to additional work and costs for the business owners, like submitting additional paperwork to the IRS and paying self-employment taxes.
Third, C corp shareholders don’t have as many limitations on what they’re allowed to deduct for retirement plans, life and medical insurance, education, and other benefits.
How Do You Know Which Structure to Choose?
Getting proper guidance on selecting a business structure is critical for business owners looking to start or scale their business.
Columbia Law’s non-credit certificate course, A Legal Toolkit for Starting and Scaling Your Business, gives business owners the opportunity to carefully work through this decision.