When making the decision between an LLC and a C Corporation, it's important to consider how you plan to organize ownership, leadership, fundraising, and hiring for your business. Both LLCs and C-Corporations allow founders and their partners to limit their responsibility to company debts and liabilities. With both options offering limited liability, it’s important to consider how you intend to structure the ownership and leadership of your business, your personal and company goals, and your potential tax obligations before deciding on a business classification.
A Limited Liability Company (LLC) operates as a business structure where members (not stockholders) pay taxes based on personal income—a "pass-through" tax structure. Ideal for e-commerce and small online projects, it offers limited liability, straightforward structure, and easy management. While it doesn't allow issuing stock or going public, many successful companies operate as LLCs.
When creating an LLC, owners establish an Operating Agreement, outlining how the business operates and how profits and costs are divided among members. Owners, referred to as members, each hold a specific percentage of "membership interest" in the business. This flexibility allows founders to structure their LLC as needed, making it a popular choice for simplicity and adaptability among small business owners.
- Ownership represented by Membership Units: Members. Not shareholders;
- Do not issue stocks;
- "Pass-through" tax structure;
- Membership interest among the members is set up in the Operating Agreement;
- It has members and MUST distribute the ownership among them.
A C-Corporation (C-Corp) is a legal entity known for its “double taxation,” where the C-Corp pays corporate income taxes and shareholders pay personal income taxes based on gains made from dividends or the sale of C-Corp stock. They have no broad restrictions on who can own shares. Other businesses or entities both in and outside the United States can have ownership with no limit to the total number of shareholders.
C Corporations are ideal for businesses seeking to raise money from angel investors or VC firms. The ownership of the company is expressed in shares of stock, and you can use these shares to raise capital and issue employee options. The individuals who own stock certificates are called shareholders.
- Owners are referred to as Shareholders;
- Issue stock/share certificates;
- Taxed as a separate legal entity;
- Must have a Board of Directors and officer positions (CEO, CFO, President, Secretary).
Making the choice between LLC X Corporation
The choice can be driven by many factors like tax obligations, corporate governance, the need to raise venture capital or issue stock to employees, or other enterprise objectives.
A corporation is different from an LLC as the owners are known as “shareholders” whose ownership percentages reflect the number of shares of company stock they own. C-Corps tend to be the best business structure for raising large amounts of capital from a wide variety of investors.
It’s always important to consider your long and short-term goals before choosing between an LLC and a C-Corp. Both offer different advantages and disadvantages based on taxation, liabilities, issuance of stock, regulation, and more.
Small e-commerce companies are usually better off as LLCs, while tech startups that are seeking to raise capital are better served as C Corps. The information provided should help you make an informed and confident decision, whichever you choose.
Why Wyoming LLCs are great: https://firstbaseio.zendesk.com/hc/en-us/articles/360056691412
Why tech startups incorporate in Delaware: https://firstbaseio.zendesk.com/hc/en-us/articles/360056691372