Choosing between a Limited Liability Corporation (LLC) or a C Corporation

Written By Xul Perez

If you are deciding what type of entity would be the best option for your new business, an LLC or a C Corporation could be your best option.  Understanding the similarities and differences between them can help you make that decision.

First, the similarities.  Both the LLC and a C Corporation are separate entities distinct from their owners. Both, when properly operated and in compliance with Ohio law, provide their owners with a personal liability shield against debts or claims made against the business.  The assets of the business and its general liability insurance may be used to satisfy claims, but the owners’ personal assets like their home and bank accounts are “shielded.”  This is a huge advantage over sole proprietorships or general partnerships where the owners are personally liable for claims against the business. 

Now, the differences.  An LLC is very easy to register, more flexible in its operating structure, and less expensive to run.  Most members choose to manage their LLC themselves (a member-managed LLC). However, they could also choose to have a more passive role and appoint managers to manage their LLC (a manager-managed LLC).  Furthermore, an LLC provides flexibility in allocating profits and losses, distributions, and other ownership interests among the members.  For instance, an LLC could have some members who have a passive role and mainly provide capital.  If those members want a rapid return on their investment, you could allocate them a higher percentage of profits for a certain period.

An LLC is generally a “pass-through” tax entity.  This means that the members, and not the LLC, pay the federal income taxes of the LLC.  For those members who wants to separate the LLC tax returns from their personal tax returns, this may be inconvenient.  However, it has the advantage of avoiding a “double taxation,” which would occur if the LLC paid income tax on its earnings, and then the members paid income tax on distributions received from the LLC.

By comparison, running a C Corporation requires significantly more administration and adherence to legal formalities making it more expensive to operate than an LLC.  For example, a C Corporation must adopt bylaws, appoint a board of directors and elect officers, hold annual or other regular meetings, record meeting minutes, and so forth.  One advantage of a C Corporation is the shares of the corporation’s stock are fully transferable.  A C Corporation, therefore, is better suited than an LLC for a company that needs to attract significant investors and award stock for equity.  Additionally, you can easily sell your company and transfer full ownership by just selling all your company’s shares.

From a tax standpoint, a C Corporation may be more costly.  The corporation itself pays income taxes on its profits, and its shareholders additionally pay taxes from the distributions or dividends that they receive.  In this way, “double taxation” occurs in the distribution of income from a C Corporation.
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In most cases, an LLC is preferred and over 90% of new business registrations in Ohio are for LLCs.  However, if you are planning on attracting investors or employees by sharing equity with them, or if your goal for your company is to become publicly traded, then forming a C Corporation is very likely your best option.  An attorney can guide you to choose the best option for your new business according to your goals and expectations.  If you cannot afford an attorney, the SEED Legal Clinic may be able to help you.  We are especially well-suited to serve northeast Ohio college entrepreneurs.  Just go to our web page www.uakron.edu/Seed and request our services.