If you are looking for liability protection and flexibility (limited admin upkeep, tax flexibility) an LLC is a great choice for new businesses. LLCs are considered easier to start and maintain.
If you are currently raising or will need to raise US venture capital, and take a company public a C Corporation is a great choice. US investors require a C Corporation to invest venture capital.
At the end of the day: it's your business, your choice
What is an LLC?
An LLC is a "Limited Liability Company."
As the name implies, it gives you "liability protection" because it is a separate entity from you. Therefore any liabilities your business incur would be associated with and fully belong to the business instead of you.
What is a C Corporation?
A C Corporation is a type of company owned by shareholders. These shareholders then purchase shares of stock which reflect ownership of the company. C Corporations have a rigid ownership structure which offers pros (ease of investment from investors) and cons (less flexibility, more ongoing paperwork/governance).
LLC vs C Corporation
To form an LLC you file an articles of organization with the state. After this you draft and sign an operating agreement which outlines the business as well as ownership %s, rights and responsibilities.
To start a C Corporation you file an articles of incorporation with the state. After this is filed, you then have to complete the "post-incorporation" set-up which includes but is not limited to: creating corporate bylaws, holding shareholder meetings, issuing shares of stock, electing a board of directors, and sending in an 83-b election to the IRS.
Advantage: LLC, due to ease of formation + no extensive post-incorporation setup
C Corporations pay a corporate income tax.
LLC owners can choose to have their business taxed as a pass-through entity (ie pay tax on business income on personal tax return or they can elect to have their business taxed as C Corporation.
C Corporations face "double taxation." What this means is a business is taxed at the corporate level once, and then if the individual receives a dividend or earnings from the business, they then have to pay tax again on their personal tax returns.
Advantage: Tie, depends on the individuals personal income tax rate + corporate tax rate in a given country + the ease of filing taxes for you as a business.
Corporations are more complicated but allow you to raise money from investors more easily.
LLCs have a more flexible ownership structure where you have have one member, two member, multiple member, or even "manager-managed" LLCs where an external appointed individual runs your business.
Advantage: Tie, because it depends on your goals as a business
C Corporations are required to hold corporate and shareholder meetings. LLCs do not have these obligations.
Advantage: LLC, due to lack of required meetings
Venture capitalists can easily invest in a C Corporation. This is much more difficult for an LLC where due to the varying structure, it can take much more diligence + research from investors to make an investment.
Advantage: C Corporation, due to ease in raising capital
In an LLC and C Corp, members/owners are not personally responsible for liabilities or business debts.
Advantage: Tie, both offer liability protection
Paperwork and Ongoing Governance
C Corporations require more ongoing governance and paperwork to maintain corporate status + stay compliant. This includes the Meetings mentioned above.
Advantage: LLC, due to less ongoing work governance + paperwork, which can be expensive and time-consuming
Why Start an LLC?
Lower Annual Fees
Generally speaking, LLCs pay less in annual fees
Greater Tax Flexibility
You can choose how you are taxed (ie avoid double taxation and be taxed as a "pass-through entity") or you can elect to be taxed as C Corporation if you'd like!
Easier Upkeep / Less Ongoing Governance
It's easier to keep your LLC running / there is less ongoing paperwork and administrative governance work which can be expensive and time-consuming.
Why Start a C Corporation?
Easier to Raise Investor Capital
Not only is it easier, but in some cases, a C Corporation is actually required to raise venture capital (ie most US investors)
The Ability to Offer Stock Options
Offering stock options is a way to create incentives between employees and the company, beyond revenue-shares and it can also be a great way to attract and hire top talent.
The Bottom Line
At the end of the day, it's your business and therefore your choice! But generally speaking:
If you're raising US Venture Capital we recommend a C Corp
If you are looking to build a bootstrapped of self-funded profitable business we recommend an LLC
We also recommend chatting with a licensed attorney or CPA (certified professional accountant) to answer any and all questions you might have that go beyond the scope of this article (or go beyond the depth of this article)!
Can I run/start a business without an LLC or C Corporation?
Yes, you can! But creating an LLC or a corporation can not only provide liability benefits to protect yourself and your assets but also open up tax benefits. Creating a company also gives you the ability to open up a US business bank account which allows you to create clear separation between personal expenses and business expenses.
What is pass-through taxation?
This is when profits, other tax items, and losses are reported on an individuals tax return ie they are "passed through" to the owners, instead of being taxed at the company level.
Is this always advantageous? Not necessarily. It depends on the corporate and individual tax rates one faces to determine what the best option is given your unique circumstance.
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