When I left my previous firm and decided to start my own business, my partners and I had some tough decisions to make as to what are business structure might be.
No matter what industry your business is in, it is important to ensure it is set up correctly for several reasons to mostly include liability and taxes.
Two common types of business filing are the Limited Liability Company (LLC) and the C Corporation.
If you are unsure which choice is right for your business, here is a breakdown of setting up the LLC vs the C Corporation.
C Corporations (C Corp)
C Corporations are one of the most common categories businesses are filed under and the oldest. Most large domestic companies are listed as a corporation. If you think of all the “Blue Chips” and many of the companies that you buy their products and services; most of those are C Corporations.
C Corporations must pay corporate income taxes which are totally separated from the income taxes of the business owner. C Corporations are therefore accountable for more taxes and the tax reporting obligations are much more complex than other business types.
They also have a different ownership structure than other business types. C Corporations operate under a hierarchy-type structure with stockholders holding divided power. The more stocks a holder owns the more voting power and profits the holder is entitled to receive. The stockholders appoint directors to make business decisions for the company. The directors will hire management to oversee the daily operation of the business.
C Corporations are typically used by large entities with shareholders and are the better choice for companies planning to offer equity to a number of owners through private means or should the company wish to go public on the stock exchange.
Limited Liability Companies (LLC)
LLCs differ from C Corporations in many ways are often used by smaller companies with one owner or a select few owners. All states in the US require that only one owner is necessary to file for an LLC.
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The IRS classifies the LLC as a “disregarded entity” and do not recognize it for tax purposes. That means that if you are a sole proprietor LLC, you'll be taxed just like that- a sole proprietor, meaning that all the profits of the business are passed directly to the owner. If your LLC has more than one member, it will be taxed just like partnership. Our setup is a little more unique in that we are all independent contractors operating under a LLC, so essentially we all file as sole proprietor's. As individual owners we are only responsible for our personal income tax. LLCs do not pay federal income tax like a corporation does.
Reasons for Setting Up The LLC vs. Corporation
We were initially only an organization of five so setting up a C Corporation didn't make that much sense. We were not interested in paying dividends and the complexity of setting up a C corporation started to make our simple brains hurt. All in all, it did not offer us any benefit.
Ultimately, that's what led us to setting up the LLC (Limited Liability Company). We were looking to get the protection from personal liability for business debts(like a personal liability insurance policy) that the LLC offered similar to a C corporation, just with less headache.
How We Drafted our LLC
It's much easier nowadays to set up a LLC. So easy, in fact, you can set one up online with such companies as Rocket Lawyer. This is something that was briefly discussed at our firm, but we ultimately decided that it was best to use a local attorney who specialized in helping small businesses. We definitely paid more than we could have online, but the higher expense was justified by having the ability to meet with the attorney face to face. It saved us hours upon hours to learn what measures we needed to follow to properly run our LLC.
Which is Right For Your Business?
As you can imagine, there is no blanket answer. A lot depends on your business structure and what you're trying to accomplish. I would suggest to follow our lead and find a local attorney who specializes in small businesses. You might even inquire with your CPA to see if they have experience in helping structure small business set-ups.
Check out Rocket Lawyer to get your business protected today.