7 Reasons to Choose LLC Over C Corp for Your Business
If you are starting a new business, one of the most important decisions you have to make is choosing the right legal structure for your company. There are many options available, such as sole proprietorship, partnership, limited liability company (LLC), corporation, and more. Each one has its own advantages and disadvantages, depending on your goals, needs, and preferences.
In this article, we will focus on two of the most common and popular legal structures: LLC and C corp. We will explain what they are, how they differ, and why you might want to choose one over the other. We will also provide you with some practical tips and resources to help you make the best decision for your business.
What is an LLC?
An LLC is a type of business entity that combines the benefits of a partnership and a corporation. It offers limited liability protection to its owners, who are called members, meaning that they are not personally responsible for the debts and liabilities of the business. It also allows for flexible management and taxation, as the members can choose how to run and tax their business.
An LLC can have one or more members, who can be individuals, corporations, or other entities. The members can also decide how to distribute the profits and losses of the business among themselves. An LLC does not have a board of directors or shareholders, unlike a corporation.
What is a C Corp?
A C corp is a type of business entity that is separate and distinct from its owners, who are called shareholders. It offers limited liability protection to its shareholders, meaning that they are not personally responsible for the debts and liabilities of the business. However, it also subjects them to double taxation, as the corporation pays taxes on its income at the corporate level, and the shareholders pay taxes on their dividends at the individual level.
A C corp can have one or more shareholders, who can be individuals or entities. The shareholders elect a board of directors, who appoint officers to manage the day-to-day operations of the business. A C corp must follow strict rules and regulations regarding its formation, governance, reporting, and taxation.
Why Choose an LLC Over a C Corp?
There are many reasons why you might want to choose an LLC over a C corp for your business. Here are some of the main ones:
Simplicity and flexibility:
An LLC is easier and cheaper to form and maintain than a C corp. You don’t need to file complex paperwork or pay high fees to register your business as an LLC. You also don’t need to follow rigid formalities or procedures to run your business as an LLC. You can create your own operating agreement that outlines how you want to manage your business, without having to comply with state or federal laws that apply to corporations.
Tax benefits:
An LLC offers more tax advantages than a C corp. You can choose how to tax your business as an LLC: either as a pass-through entity or as a corporation. If you choose the pass-through option, you can avoid double taxation by reporting your income and expenses on your personal tax return, instead of paying corporate taxes. You can also deduct your business losses from your personal income, which can lower your tax liability. If you choose the corporate option, you can enjoy lower corporate tax rates than those of a C corp.
Personal asset protection:
An LLC provides better personal asset protection than a C corp. As an LLC member, you are not liable for the debts and obligations of your business, unless you personally guarantee them or act fraudulently or illegally. Your personal assets, such as your home, car, bank accounts, etc., are safe from creditors or lawsuits that target your business. As a C corp shareholder, however, you might face personal liability if you commingle your personal and business funds or assets, or if you fail to respect the corporate veil that separates your business from yourself.
Ownership flexibility:
An LLC allows for more ownership flexibility than a C corp. You can have as many members as you want in your LLC, regardless of their citizenship or residency status. You can also transfer your membership interest in your LLC without affecting its existence or operation. You can also decide how to allocate your profits and losses among your members, based on their contributions or agreements. A C corp, on the other hand, limits the number and type of shareholders it can have, depending on its tax status (e.g., S corp vs C corp). It also requires shareholder approval for any transfer of shares in the corporation. It also distributes its profits and losses equally among its shareholders,
based on their share ownership.
Privacy protection:
An LLC offers more privacy protection than a C corp. As an LLC member, you don’t need to disclose your personal information or financial details to the public or the government. You only need to file a simple annual report with your state that lists your registered agent and address. You also don’t need to hold regular meetings or keep minutes or records of your business activities. A C corp, however, requires you to file annual reports, tax returns, and other documents that reveal your personal and business information. You also need to hold annual meetings and keep minutes and records of your board and shareholder actions.
Future growth potential:
An LLC allows for more future growth potential than a C corp. As an LLC member, you can easily raise capital for your business by adding new members or accepting loans from existing members. You can also convert your LLC into a corporation if you want to access more funding options, such as venture capital, angel investors, or public offerings. You can also merge or acquire other businesses as an LLC without triggering tax consequences. A C corp, however, faces more challenges and costs when raising capital for its business. It has to issue new shares or bonds, which can dilute the ownership and control of its existing shareholders. It also has to pay taxes on any gains or losses from its mergers or acquisitions.
Expert export management:
An LLC enables you to have expert export management for your business. As an LLC member, you can leverage your skills, knowledge, and experience in your industry or niche to manage your business effectively and efficiently. You can also hire or partner with other experts who can help you with your export strategy, marketing, logistics, compliance, and other aspects of your international trade. You can also benefit from the support and resources of various organizations and agencies that assist small businesses with exporting, such as the U.S. Small Business Administration (SBA), the U.S. Commercial Service (USCS), the Export-Import Bank of the United States (EXIM), and more. A C corp, however, might have more difficulty in finding and retaining expert export management for its business. It might have to rely on external consultants or advisors who charge high fees or have conflicting interests. It might also have to compete with larger corporations that have more resources and connections in the global market.
The Rise of LLCs Taxed as C-Corps
One of the most common business structures in the U.S. is the limited liability company (LLC). An LLC combines the flexibility and simplicity of a partnership or sole proprietorship with the liability protection of a corporation. However, some LLC owners may choose to have their LLC taxed as a C-corporation (C-corp) for various reasons. In this blog post, we will explore the benefits and drawbacks of electing to have an LLC taxed as a C-corp, and how to do it.
Why Choose an LLC Taxed as a C-Corp?
By default, an LLC is taxed as a pass-through entity, meaning that the profits and losses of the business are passed through to the owners (members) who report them on their personal income tax returns. This avoids the double taxation that C-corps face, where the corporation pays taxes on its net income and the shareholders pay taxes on their dividends.
However, there are some situations where an LLC may benefit from being taxed as a C-corp, such as:
The LLC plans to raise capital from outside investors who prefer to invest in corporations.
The LLC expects to reinvest most of its profits back into the business and pay little or no dividends to its members.
The LLC wants to offer fringe benefits to its members and employees that are deductible for the corporation but taxable for the recipients.
The LLC has high-income members who want to lower their self-employment taxes by paying themselves a reasonable salary as employees of the corporation.
The LLC wants to take advantage of certain tax credits and deductions that are only available to corporations.
How to Elect an LLC Taxed as a C-Corp?
To elect to have an LLC taxed as a C-corp, the LLC must file Form 8832, Entity Classification Election, with the IRS. The election can be made at any time, but it is generally advisable to do it when forming the LLC or at the beginning of the tax year. The election is effective for the current tax year and all subsequent years, unless it is revoked or terminated.
Once an LLC elects to be taxed as a C-corp, it must follow the tax rules that apply to corporations, such as:
Filing Form 1120, U.S. Corporation Income Tax Return, and paying corporate income tax on its net earnings.
Issuing Form 1099-DIV, Dividends and Distributions, to its members who receive dividends from the corporation.
Filing Form 941, Employer’s Quarterly Federal Tax Return, and withholding and paying payroll taxes for its employees.
Complying with state and local corporate tax laws and regulations.
What are the Pros and Cons of an LLC Taxed as a C-Corp?
As with any business decision, electing to have an LLC taxed as a C-corp has its advantages and disadvantages. Some of the pros and cons are:
Pros:
An LLC taxed as a C-corp may attract more investors who are familiar with the corporate structure and prefer its legal certainty and stability.
An LLC taxed as a C-corp may retain more capital for growth by reinvesting its profits without paying taxes at the member level.
An LLC taxed as a C-corp may offer more tax-deductible fringe benefits to its members and employees, such as health insurance, retirement plans, and education assistance.
An LLC taxed as a C-corp may reduce the self-employment taxes of its high-income members by paying them salaries as employees of the corporation.
An LLC taxed as a C-corp may qualify for certain tax credits and deductions that are only available to corporations, such as the research and development credit, the domestic production activities deduction, and the small business health care tax credit.
Cons:
An LLC taxed as a C-corp may face double taxation if it distributes dividends to its members, who will pay taxes on them at their personal income tax rates.
An LLC taxed as a C-corp may lose some of the flexibility and simplicity that an LLC offers, such as having fewer formalities and reporting requirements.
An LLC taxed as a C-corp may incur higher administrative costs and fees associated with filing corporate tax returns and complying with corporate tax laws.
An LLC taxed as a C-corp may have more difficulty changing its tax status in the future if it decides that being taxed as a C-corp is no longer beneficial.
An LLC taxed as a C-corp is not a common choice for most small businesses, but it may be suitable for some situations where an LLC wants to raise capital from outside investors, reinvest most of its profits back into the business, offer more fringe benefits to its members and employees, lower its self-employment taxes, or take advantage of certain corporate tax credits and deductions. However, an LLC taxed as a C-corp also faces the risk of double taxation, the loss of flexibility and simplicity, higher administrative costs and fees, and more difficulty changing its tax status. Therefore, an LLC should carefully weigh the pros and cons of electing to be taxed as a C-corp before making the decision.
References:
LLC Taxed As C Corp: Everything You Need to Know – UpCounsel
LLC Vs. C-corp: What’s the Difference? – Forbes
LLC Filing as a Corporation or Partnership – Internal Revenue Service
LLC vs C Corp | Key Differences & Which To Choose? – VentureSmarter
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
https://www.investopedia.com/terms/l/llc.asp
https://www.investopedia.com/terms/c/corporation.asp
https://www.thebalancesmb.com/llc-vs-corporation-which-is-best-for-your-business-397501
https://www.nolo.com/legal-encyclopedia/llc-basics-30163.html
