C Corporation vs LLC - Difference and Comparison

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	C Corporation	LLC
		Currently 3.19/5 1 2 3 4 5 Rating: 3.2/5 (75 votes)
Management Level:	Officers, board of directors	Only Members and managing members.
History:	Corporations (derived from corpus, the Latin word for body, or a "body of people") are the oldest company structure.	This structure started a few decades ago
Suitable for:	Medium-size to large businesses with many shareholders (including institutional investors)	Small businesses
Paperwork and records:	Formal board and shareholder meetings and minutes are required. Annual state reports are also required to be filed.	Not much paperwork is required. Annual state reports are required.
Ownership:	Shareholders are owners.	Members are owners.
Choice of taxation structure given:	No. The profits of a C corporation are taxed at the corporate tax rate.	Yes
Limited Liability:	Yes	Yes
Continuity of life:	Indefinite term	Indefinite term
Shareholders meeting:	Formal shareholders and board meetings are required.	Not necessary
What is it?:	A type of company	A type of company
Taxation:	Double taxation (Company income is taxed at corporate tax rate; shareholders also pay tax on dividends or profits distributed)	Single taxation (Income / loss passed directly to members)
Assets:	Can hold	Can hold
Legal entity:	Separate entity from shareholders (owners), who cannot be normally held liable for any fiscal obligations	Separate entity from partners but members may be held liable for non fiscal obligations.
Members needed to set up:		Between 1-5
Legal agreements:		May not be required in some states.
Regulation of entity name:		Differs with each state but mostly LLC or L.L.C. is added.
Stands for:		Limited Liability Company
Prevalence:		LLCs are very common in the USA.

While an LLC and a C corporation are both corporate structures offering liability protection to owners of the company, they differ in several important ways. LLCs combine the benefits of partnerships (single taxation) with the advantages of corporations (limited liability).

1 Differences in formation
2 Differences in taxation
- 2.1 Tax Reporting for LLCs and S-corps
3 Differences in management and operation
4 Related Articles
5 References

[edit] Differences in formation

Typically, forming an LLC only requires a state filing (usually to the Secretary of State's office). The state filing typically consists of information such as:

Members: All LLCs must have at least one member. LLC members are the owners of the LLC much as shareholders are the owners of a corporation or the partners of a partnership. Like shareholders, a member's liability to repay the LLC's obligations is limited to his or her capital contribution. Members may be natural persons, corporations, partnerships, or other LLCs.
Membership Interest: A member's ownership interest in the LLC is called a membership interest. Membership interests are often divided into standardized units which, in turn, are often called shares. Unless otherwise provided for in the operating agreement, a member's right to control or manage the LLC is proportionate to their membership interest.
Manager: LLCs are, by default, managed by their members in proportion to their membership interests. Many LLC operating agreements, however, provide for a manager or board of managers to run the day-to-day operations of the LLC. The managers are elected or appointed by members and may also be removed by members. A member may also be a manager, often called the managing member (similar to the managing partner of a partnership).
Articles of Organization: All LLCs must file evidence of their existence with the secretary of state (or some governmental office) of the state where they choose to be organized. The Articles of Organization serve this purpose and are the LLC version of a corporation's Articles of Incorporation. Although the specific information that must be included in the Articles of Organization varies by state, all LLCs must disclose their company name (which must conform to rules set forth by the state of organization), appoint a statutory agent and disclose their valid business purpose. The fees associated with filing the Articles of Organization also vary by state.
Operating Agreement: The Operating Agreement of an LLC is the document most important to its success because it determines, defines, and apportions the rights of the members. Because the various LLC statutes offer so much flexibility (see discussion below), and the default statutory rules do not fit most LLC's needs, Operating Agreements must be drafted carefully and with much discussion and agreement between the prospective members.

Depending upon the city where the LLC is operating, a filing with the city may also be required. A Federal Tax ID (also called Employer Identification Number) is also required for an LLC that has employees.

An S corporation is a corporation that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code of the IRS. The formation typically requires a state filing, obtaining a Federal Tax ID and an S election. The state filing typically consists of:

Articles of Incorporation
Corporate Bylaws
Written consent of incorporator
Resolutions of the first meeting of the Board of Directors

[edit] Differences in taxation

While employee Medicare and FICA taxes, as well as state taxes are not affected by a company's corporate structure, federal income tax treatments may be different for LLCs and C corporations. The corporate tax rate is usually lower than the personal income tax rate. However, in the case of C corporations, there is double taxation because (a.) The corporation is taxed on profits, and (b) when these profits are distributed to shareholders (owners), the owners are taxed on these dividends.

While a C corporation does not have any choice in terms of federal income tax treatment, an LLC can choose to be taxed either as an S corporation or a C corporation.

If an LLC chooses to be taxed as an S corporation (see C Corporation vs S Corporation) the LLC can bypass double taxation by reporting the entire income on the personal income tax returns of the members. This is usually done in proportion to the ownership of each member in the LLC, but may be structured differently in the operating agreement. Not only does this allow bypassing double taxation, it also means that the losses incurred by the company can be reported on the shareholders' personal income tax return, thereby reducing their tax liability. C corporations carry their losses forward to offset them against future profits of the company.

[edit] Tax Reporting for LLCs and S-corps

For C corporations, tax reporting is on Form 1120 for income, Salaries on Form W-2 and Profit distribution on Form 1099-DIV.For LLCs, members report income on their personal income tax Form 1040 Schedule C OR Form 1065 & Schedule K-1 for profit distributions. LLCs may also opt to be taxed as C or S corporation. For S corporations, shareholders report income on Form 1120S, Salaries on Form W-2 and Profit distribution on Schedule K-1.

[edit] Differences in management and operation

C corporations are managed by a board of directors, elected by shareholders. Day-to-day operations are managed by officers who are appointed by directors.

LLCs can be member-managed or can have a team of managers. This flexibility is similar to a partnership and allows LLCs to outline management duties in their operating agreement, with an optional board of managers.

LLCs usually provide more flexibility in operations since formal shareholder and board meetings are not required. C corporations require that formal shareholder and board meetings be held and the minutes of these meetings be documented and filed.

Both LLCs and C corporations are required to file annual reports with the state in which they are incorporated.