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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 businesses and protect their personal assets at the same time.
LLC
C-corp
Legal entity
Yes
Yes
Tax entity
No
Yes
Types
Single-member LLC,
Multi-member LLC
Just C-corp
Liability protection
Yes
Yes
Default tax treatment
Sole proprietorship for single-member, Partnership for multi-member
C-corp
Double taxation
No
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.
Organizational structure
Members usually govern and execute everything
Shareholders elect board members who govern the corporation. These board members choose officers(including the president, vice president, etc.) who
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 an LLC And a 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 a 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 an LLC And a C-Corp Ideal For?
LLC is ideal for small business owners who have been running sole proprietorships 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. Once the store picks up, you can elect to be classified as an S-corp.
Single member LLC would be ideal during the initial days. After you start earning more than $60k per annum, you may want to be elected as an S-corp.
Choosing LLC and electing your LLC as a corporation would save some money on taxes as compared to the default multi member LLC. Alternatively, you could also choose to be elected as an S-corp for additional tax savings.
For a high-growth SaaS company, a C-corporation is usually the better business entity. Only a corporation can issue stock to your employees, contractors, or investors. S-corps have a limitation of a maximum 100 individual shareholders. That means institutional investors cannot be shareholders.
Tax Treatment
How Are an LLC And a 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 an LLC And a 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
6%
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
6%
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 – 1.3%
Payroll tax (employer)
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
Frequently Asked Questions
Here are the most commonly asked questions about LLCs and C-Corps:
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.