Doing business is a great responsibility. There are many formalities that you have to fulfill before indulging in any Business Idea. Choosing a proper form for your venture is very important for the success of a start-up. Therefore it is essential to know about the pros and cons of any particular form of business. With this, the taxation policies, Tax slabs and other regulatory and legal obligations are also determined by the form of the business.
Thus being an entrepreneur, it is important to know how to choose a business structure. For initiating the business, you have to first create a proper business plan. Besides this, a proper corporate structure also helps you in assessing how to grow your startup quickly. The structure of your start-up depends upon the business plan. Here a comparison between two common structures of the business LLC and C corporation has been done.
While LLC and C corporations both are business structures. They differ in some ways. Here a distinction is described between both forms of Business.
Limited Liability Company provides flexibility to the sole proprietorship and partnership. In this corporate structure, the risk is low. In the corporation, the owners are known as the shareholders and in LLC, these are known as members. With this in LLC, the members have limited liability, they are not liable for the corporate losses or Debts. In other words, it can be said that they have the personal liability up to the sum invested by them, not beyond that.
The members of the LLC pay the taxes as a share of personal income. It is the same as the owners of the sole proprietors and partnership firms. However, an LLC can select the structure of taxation as C-corporations and S-corporations if it fulfills the other requirements.
It is a legal body that is incorporated under a specific Act or Companies Act. Here the formalities are more than the LLC. The incorporation of the company is done by the professionals. The investors are known as the shareholders and these are the real owners of the entity also. Shareholders also enjoy the liability towards the corporate as the LLC members do. But this kind of business structure has more formalities and is useful for long-term business planning.
Unlike the LLC and Corporation, the C corporation is not a type of business structure rather it is a tax classification that is available to both the LLC and the Corporate body. C corporation is described under the internal revenue code where the “C” denotes the tax designation. C corporation pays the income tax, using a specific form named IRS form 1120. In this segment, the shareholders are liable to pay the taxes if they get the earnings through a dividend or sell their stocks and they pay the taxes on their income. This tax system is known as the "double tax system".
C corporations do not have any strict restrictions on who can own the shares. Thus the business entities outside and inside the United States can have ownership. There is no limit to the total number of shareholders. This kind of business structure is beneficial for those entrepreneurs who have to raise more capital from the market. C-corporations are useful where there are many investors and a huge sum is to be invested.
Every Business form has some pros and cons. LLC is beneficial for sole proprietorships and partnerships. Still, there are some cons to it. Here the highlights and challenges of LLC are described as under:
Do not have the Double Taxation structure such as C-corporations.
Owners have Limited Liability. They are not liable for paying the debts from their assets or funds.
Lesser formalities and obligations.
Can choose the tax status, and can be viewed as the C-corps or S-Corp by the IRS.
Have Greater flexibility.
No strict management structure, as it is free from the government mandate.
LLC is not able to issue the shares in Public.
The profits are distributed among the members of the firm.
Difficult in finding the sources of investments as the members have to arrange the funds on their own or from their savings.
Owners are liable to pay the self-employment tax on the profits earned by the firm.
Unlike LLC, C corps also have bright and dark sides. Here some common pros and cons of the C corps are described, These are as under:
There is limited liability for every employee, shareholder, director and officer.
No specific limit for the number of shareholders within or outside the country.
Great source of equity financing and provides the facility to have enough investors.
Lower maximum tax rate as compared to the personal tax rates.
There is Double taxation, as the earnings are taxed at the rate of 21% as corporate tax and then again in the form of personal tax if the shareholders get any personal income in the form of dividends or gains.
The shareholders are not liable for writing off the personal losses from their income.
More expensive and time-consuming.
Have more formalities and obligations.
Complex management structure and more complicated process.
It is very complicated to choose between LLC and C-Corps, but with the help of professional advice, you can have a clear idea about the pros and cons of both corporate structures. There are separate legal formalities for both kinds of business structures. Although choosing a form of corporate depends upon the duration of business, taxation liabilities, capital and day-to-day management activities. After determining the kind of business and the management process, you can choose any of the corporate structures. Besides this, there is great importance in planning for starting a business, as this can also guide you in choosing a proper corporate structure.
If you have less potential for risk-taking and do not want to indulge yourself in many legal formalities then you may go for LLC. On the other hand, if you have a long business plan and enough sum to invest, then you can go for C-Corps. This completely depends upon your financial, legal and economic potential. Thus many aspects help you in determining the proper corporate structure. You can take the advice of a professional, as this can save your time and reduce your anxiety about how to choose a business structure. Every entrepreneur has his plans and according to the business plan, a proper legal corporate structure can be chosen.
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A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.