C-Corp vs LLC (What's the Difference?) - MarketWatch (2024)

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A corporation is a formal business entity created under state law that protects its owners from personal liability arising from activities of the business. Small business owners with plans to expand their companies or generate investment from venture capitalists often form corporations because they’re structured for easier growth.

A corporation is also known as a C-corporation by default, which is its tax classification. It’s named after subchapter C of the Internal Revenue Code which lays out the general tax structure of the entity type. C-corps are notorious for being subject to “double taxation,” meaning a corporation pays a corporation tax on its profits to the IRS (the rate is 21% as of 2023) and any dividends paid to shareholders are taxed at their personal income tax levels. Some corporations can choose to be taxed as S-corps if they meet certain requirements.

A limited liability company (LLC) is a hybrid business entity that combines the benefits of sole proprietorships and partnerships with the legal protections of a corporation. LLCs are relatively easy to form and maintain, and have flexibility with management and tax structure.

By default, LLCs are subject to pass-through taxation, meaning all of the business income “passes through” to the members’ (owners of an LLC) personal tax returns. However, LLCs can also choose to be taxed either as S-corps, which enjoy pass-through taxation as well, or C-corps, which are subject to double taxation.

C-corps and LLCs are both formal business entities that must be registered and maintained at the state level. You must have a unique name for either type of business and designate a registered agent or registered agent service to receive mail. The key structural similarities between C-corps and LLCs include their indefinite terms, liability protections and tax options.

Indefinite Term

Though you can designate a fixed time period for your business during formation in many states, by default, you don’t have to. Both C-corps and LLCs can operate as long as the owners or members want the business to continue, provided the business remains in good standing with the state where it was created.

Limited Liability

One of the most attractive features of formal business entities is that they protect their owners’ personal assets from business creditors and lawsuits — except in extraordinary circ*mstances. This means if a business fails, the owners only risk losing what they contributed to the business.

S-Corp

Both C-corps and LLCs can elect to be taxed as S-corps if they meet certain criteria. An LLC taxed as an S-corp must not have more than 100 members and the members must all be individual U.S. residents (not other business entities). Corporations taxed as S-corps must not have more than 100 shareholders who are individual U.S. residents, and can only issue one class of stock. You can elect S-corp status for your LLC any time after formation, but it must be within 75 days of the start of a tax year to apply during that year.

Formation and maintenance requirements constitute the main differences between LLCs and C-corps. Which structure you choose should depend on where you want to operate and how large you want your business to be.

Maintenance Requirements

While the formation process is similar for LLCs and corporations, maintaining them looks different. Requirements for C-corps include electing a board of directors, holding annual shareholder meetings, drafting corporate bylaws and issuing stock to shareholders in many cases. LLCs, on the other hand, aren’t required to have a board of directors, hold meetings or issue ownership shares to shareholders.

Ownership Changes

Corporations are managed by officers and a board of directors, and are owned by shareholders. LLCs are owned and usually led by members. Unless other arrangements are made in the LLC’s operating agreement, if a member dies or leaves the business, it’s possible the business could be required to shut down and re-organize to continue to operate.u Corporations, on the other hand, continue to operate independent of what goes on with officers and shareholders.

Taxes

LLCs have more flexible tax structure options than corporations. An LLC by default is a pass-through entity, meaning it’s taxed like a sole proprietorship if it has one member, or a partnership if it has more than one member. Members must pay self-employment tax which consists of Social Security and medicare taxes, something a corporation must only pay if it has employees. LLCs can choose to be taxed as C-corp or S-corp, whereas most corporations don’t have the option of pass-through taxation. Still, some corporations can elect S-corp taxation if they meet certain criteria.

Growth and International Operations

Corporations are better suited for growth and expansion. The corporate structure is recognized outside of the U.S., whereas LLCs only operate in the U.S. Corporations can easily form subsidiaries whereas LLCs are more limited when it comes to structural changes. Corporations can bring on investors or issue stock to raise money. LLCs don’t issue stock and many venture capitalists won’t deal with LLCs — only corporations.

LLCs tend to be the less expensive option upfront. The filing fees to establish an LLC typically range from $50-$500 depending on the state. LLCs also have fewer compliance requirements and formalities than C-corps, reducing legal and accounting expenses. However, C-corps may offer more tax benefits in the long run.

While LLCs are pass-through entities where profits and losses pass to the owners’ personal returns, C-corps allow business losses to offset income earned. C-corps can also potentially qualify for more business tax deductions. But increased record-keeping and formalities like shareholder meetings add to administrative costs.

As with any comparison, there are pros and cons between these two types of businesses.

C-Corp vs. LLC: Advantages

In the C-corp structure, company profits can remain in the company rather than being paid out to shareholders. A C-corp can also easily issue shares of stock to raise money to expand the business. They’re recognized internationally, structured for growth and able to operate independently of owners.

LLCs are usually smaller business operations and therefore easier to manage and maintain. LLCs have more tax and management flexibility than corporations, with fewer reporting requirements.

C-Corp vs. LLC: Disadvantages

Taxation, at corporate levels, is more complicated and burdensome than with LLCs. The biggest disadvantages to owning a corporation are the corporate income tax rates on all profits and not being able to write off losses at the personal income level. There are also more onerous record-keeping and annual reporting requirements.

Disadvantages of LLCs include limited growth and structure opportunities. LLCs also pass through all income to the members, so profits can’t stay in the business without being taxed like they can at the corporate level.

Forming either type of entity can be easy for an entrepreneur with the help of a top business formation service. These services will help you file your paperwork for $0 or a flat fee plus state fees.

Form an LLC

Whether you hire a formation service or DIY, forming an LLC in your state isn’t rocket science. It consists of choosing a unique name, designating a registered agent, filing articles of organization, drafting an operating agreement and obtaining an employer identification number (EIN).

Form a C-Corp

There are two ways to create a C-corporation: either form your corporation as a legal entity, or form an LLC and elect C-corp tax classification.

Incorporation. Forming a corporation as a legal entity is similar to forming an LLC. You’ll choose a name and registered agent, file articles of incorporation and decide on other structural details for your business. However, unlike forming an LLC, you’ll also be required to elect a board of directors. By default, your corporation will be taxed as a C-corp.

Elect C-Corp Tax Status for LLC.The second way to create a C-corp is to form an LLC and elect to be taxed as a C-corp. To do this, form an LLC as you normally would and file Form 8832, Entity Classification Election, with the IRS to change your tax classification.

A C-corporation is best suited for medium to large businesses that anticipate eventually going public or being acquired. The C-corp structure allows for an unlimited number of shareholders and separate taxation of the corporation from its owners. This enables C-corps to raise capital more easily through the sale of stock. The downside is C-corps are subject to double taxation—once at the corporate level and again when dividends are distributed.

LLCs are best suited for smaller businesses because of their flexibility, cost and convenience. LLCs require far less paperwork to both create and maintain than an S-corp. LLCs will also offer members more flexibility in terms of ownership, management and profit sharing since almost everything can be determined by the LLC’s operating agreement. While the tax benefits may not be as advantageous as with an S-corp, an LLC does still avoid corporate taxes while shielding you from liability.