Is an LLC a C Corp?: Everything You Need to Know
An LLC and a C corp are quite different business structures, although they do share some similarities, and an LLC may choose a C corp tax election with the IRS.3 min read
Is an LLC a C corp? No—they are quite different business structures, although they do share some similarities, and an LLC may choose a C corp tax election with the IRS, meaning it will be taxed as a C corp would, so it is understandable how there can be confusion.
That said, LLCs and C corps should not be confused with one another, for the differences between the two are too great to be ignored.
An LLC, or a limited liability company, is a business structure that combines the limited liability of corporations with the business flexibility of partnerships. Its ownership is restricted to members and it may even be managed by members (although managers may be hired). Those who intend to keep their enterprises small often prefer this structure.
A C corp, or C corporation, on the other hand, has more internal formalities and less flexibility, but also enjoys limited liability protection and unrestricted ownership, making it the better choice for those who aspire to one day have large, publicly traded companies. It is owned by shareholders and is run by directors and officers.
Such differences are only the most basic ones, and there are many more with wide-ranging implications. Therefore it is important to consider both choices thoroughly—perhaps with the help of legal counsel—before making a decision.
How to Form an LLC
If you choose to form an LLC, you will find the process to be somewhat easier than that of forming a C corporation, as there are less formalities and paperwork to deal with, although the filing fees tend to be about the same.
To form an LLC, you must:
- File articles of organization at the state level.
- Obtain licenses and permits.
- Register a trade name if you will not be doing business under your official LLC name.
In addition, although it is not required, it is recommended to put together an operating agreement for your LLC. A well-drawn operating agreement will state the percentage of interest each member will receive, what each member’s rights are, how the company will be run, and other essential operational information. Having one may be less important for single-member LLCs, but it may still be a good idea.
How to Form a C Corp
- File articles of incorporation.
- Draw up organizational resolutions and bylaws that lay out the corporation’s operating rules.
- Choose a board of directors.
- Issue stock certificates to initial shareholders.
- Appoint a registered agent.
- Register a trade name if you will not be doing business under your corporation name.
- Obtain licenses and permits.
Personal Liability for LLCs
One of the most important considerations you should have as a business owner is what your liability situation will be, and although both LLCs and C corps offer limited liability, there are limits to this that should be noted.
For LLCs, limited liability gives a partial shield to LLC members from LLC-related liabilities, including legal actions and debts. This means that your personal assets will not be at risk from business-related issues, although it is important to note the word “partial,” as some courts have ruled against complete shielding in certain situations.
It should also be noted that if you sign a personal guarantee on a business loan, then your personal assets will be fair game to creditors if your LLC cannot continue its loan payments.
Personal Liability for C Corporations
C corporations also offer limited liability to individuals involved with them, such as directors, officers, and stockholders, although this protection is technically only partial, as well.
In most cases, the parties concerned in a C corporation will have their personal assets protected by limited liability because the corporation is considered an entity separate from them. However, if negligence or misconduct has occurred, such as in the case of fraudulent financial dealings, a court can “pierce the corporate veil” and come after the personal assets of members, owners, and shareholders in order to satisfy the corporation’s legal obligations.
Also, as with LLCs, if a loan taken out for a corporation is done so with a personal guarantee, your personal assets can be pursued if the terms of the loan are not honored.
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