LLC vs C-corp

LLC and C-corp are both popular business entities among business owners.

Most small business owners are confused between LLC and C-corp during their initial days. That's normal.

In this guide, we'll break down what's common between them and what's not.

LLC makes it super easy for business owners to grow their business and protect their personal assets at the same time.

Before we dive in, here's a quick summary table.

LLC

C-corp

Legal entity

Yes

Tax entity

Yes

Types

Single-member LLC,
Multi-member LLC

Just C-corp

Liability protection

Yes

Default tax treatment

Sole proprietorship for single member, Partnership for multi member

C-corp

Double taxation

Yes

Formalities

Relatively less. Easier to maintain

More paperwork, meetings, filings, documents

Ownership

Owned by members

Owned by shareholders in accordance with the amount of shares they hold.

Organisational structure

Members usually govern and execute everything

Shareholders elect board members who govern the corporation. These board members choose officers(including president, vice president, etc) who execute stuff

Definition

What are LLC and C-corp?

Limited Liability Company or LLC, a legal entity formed under state statutes, is like a hybrid between a corporation and a sole proprietorship. It gives business owners protection from personal liability and has pass-through income.

C-Corporation or C-Corp is an independent legal entity that's separate from its owners and has a perpetual existence. It gives protection from personal liability, but does not pass-through income to its owners (shareholders).

Types

What are the different types of LLC and C-corp?

LLC with a single member(owner) is referred to as a single member LLC, whereas if you have multiple members, it is known as multi-member LLC. Without changing the legal entity, an LLC can also elect to be treated as a C-corporation or S-corporation for tax purposes.

There are various types of corporations (C-corp, S-Corp, B-corp, close corporation, etc), but you can't really say there are types of C-corp. C-corp can elect to be treated as an S-corporation.

Ideal for

Who are LLC and C-corp ideal for?

LLC is ideal for small business owners who have been running sole proprietorship and would need liability protection. It is sort of the next stage that business owners move into after starting their business as a sole proprietorship.

C-corp is ideal for startups who wish to raise outside capital and are expecting high-growth. Shares in a C-corp can be easily bought and sold. That's one of the reasons why investors love C-corp.

For various businesses

If you’re just starting out and don't expect to raise outside capital for quite some time, you can choose an LLC. If you’re looking for venture funding soon enough, it’s better to register as a C-corp

Single member LLC would be ideal during the initial days. However, it's important to keep your personal assets and expenses separate from your business assets. If you use softwares for personal and business use, keep them separate.

Choosing LLC and electing your LLC as a corporation would save some money on taxes as compared to the default multi member LLC. For agencies operating on thin margins, this is some relief. However, unless the agency is looking to raise venture funding, you needn't choose a C-corp

For a high growth SaaS company, C-corporation is usually the better business entity. Only a corporation can issue stock to its employees, contractors and investors.

Tax treatment

How are LLC and C-corp treated by IRS?

LLC is governed by state statues. It is only a legal entity, not a new tax entity. By default, LLCs with a single member are treated as a sole proprietorship and multiple members are treated as a partnership. They have a pass-through income, meaning the business income is transferred to the members and are not taxed at the LLC level. Members pay taxes at their individual level. There is no double taxation. If the LLC doesn't want the default treatment, they can elect to be treated as a C-corp or an S-corp.

C-corp is a separate tax entity itself. It is separate from its shareholders. It does not have pass-through income. This means business income is taxed at the corporation level and is not automatically passed through to the shareholders. In addition, shareholders pay individual taxes on the dividends received from the C-corp. Therefore, there is double taxation. This is how a C-corp is treated by default. If they elect to be treated as an S-corp, then the tax treatment is different.

Tax rates

How exactly are LLC and C-corp taxed?

Single member LLC

A single member LLC usually pays 2 types of taxes: payroll tax and franchise tax. Members of the LLC pay income tax at the individual level.

32-37%

Top 3 personal income tax rates

21%

Corporate income tax rate on profits

23.8%

Individual income tax on shareholder's dividends

6.2%

Employer portion for social security tax

1.45%

Employer portion for medicare tax

Total FUTA tax including state credit

C-corp

C-Corp usually pays 3 types of taxes: Income tax, payroll tax and franchise tax. In addition, shareholders usually pay income tax at their individual level

21%

Federal corporate income tax rate

0-13.3%

State corporate income tax

6.2%

Employer portion for social security tax

1.45%

Employer portion for medicare tax

Total FUTA tax including state credit

23.8%

Individual income tax on shareholder's dividends

Costs

How much do an LLC and a C-corp cost?

The costs to register and maintain an LLC and a C-corp depend on a lot of factors: state of operation, nature of business, etc.

Single member LLC

LLCs are considered relatively less expensive.

One time

Formation fee for the State

$90

Reserve business name

$75

Annually

Registered agent costs

$100 - $300

State franchise tax

$50 - $800

Quarterly

Income tax

21 - 37%

Payroll tax (employer)

7 - 10%

Service charges

Lawyer

$100 - $500/hour

CPA

$100 - $500/hour

C-corp

Due to its complex structure, C-corp is usually more expensive.

One time

Incorporation fee for the State

~$100

Reserve business name

$75

Annually

Registered agent costs

$100 - $300

State annual report fees

$50 - $75

Quarterly

Federal Income tax

21 - 28%

State Income tax

0 - 13%

Payroll tax - employer contribution

7 - 10%

State franchise tax

$175 - $250,000

Personal capital gains tax

0 - 20%

Service charges

Lawyer

$100 - $500/hour

CPA

$100 - $500/hour

FAQ

C-Corp requires more paperwork than LLC. However, most of them are one-time and may not require a lot of your time. There are a couple of annual reports to be filed with the federal and state agencies. You will also have to conduct board meetings and record minutes for it.

For single and multi member LLCs, members cannot be the employees just to pay themselves a salary. It's almost illegal to do so. However, it is allowed in a C-corp.