Founders and small business owners need to carefully consider the structure of their business for multiple reasons. Making the move from a Limited Liability Company (LLC) to a C corp (C corporation) is a big jump, but one that can offer advantages in some cases.

Even as one of the most consequential choices a founder can make, choosing between a C Corp vs LLC without fully understanding the trade-offs can be difficult. Both are business structures that provide liability protection, though in different ways. They differ in the way they are taxed, who actually owns them, and how they are set up to grow.

What is an LLC?

An LLC is one of the most flexible forms of business ownership, available to most founders and startup business owners. It generally offers liability protection for all members, helping protect your personal assets from business claims. By default, it is also a pass-through taxation entity, which means earnings aren’t taxed at the business level and again at the owner level, though other tax elections are available, including S corp and C corp treatment. Be sure to take a look at our LLC guide for more in-depth coverage of the benefits it offers.

What is a C corp?

A C corp is what most people think of when they consider a corporation. It is a separate legal entity from its owners, operating through a shareholder structure. As such, it can issue multiple classes of stock and establish various ways owners share in the profits. C corps are typically the standard structure when a business plans to raise significant outside investment or go public.

A key difference is that C corps pay corporate income tax themselves, currently at a flat federal rate of 21% (see IRS Publication 542, Corporations). Then, profits paid to shareholders as dividends are generally taxed again on the shareholders’ personal returns. This creates double taxation. You can explore this more in depth in our C corporation guide.

C corp vs. LLC: The key differences

Take a closer look at this C corporation vs LLC comparison of the most important distinctions between the two. Note that no single structure is best in every situation.

Taxation

Taxes are at the heart of this decision-making process. Here’s the difference:

• LLCs: By default, they are pass-through taxation entities. That means profits and losses flow to the members’ personal returns, and there is no entity-level federal income tax. An LLC can also elect to be taxed as an S corp or C corp, which changes the tax structure and adds flexibility.
• C corps: Corporations pay taxes at the corporate level first, at a federal rate of 21%. Then, taxes are generally paid again when dividends are paid to shareholders. That’s double taxation, and it can be costly for some businesses.

Why would you choose double taxation? Some founders reinvest profits rather than distributing them, which can reduce the impact. And the 21% corporate rate may be lower than some owners’ personal income tax rates. In some cases, that makes this tax structure less of a factor. Always speak to a CPA about how these decisions would impact your business’s finances.

Ownership and shareholders

The next big difference in a C corporation versus an LLC is in who owns them and how they are owned.

• LLCs: Owners are called members. Members can be individuals, corporations, other LLCs, and even foreign individuals or entities. With few limitations, almost anyone can own part of an LLC, and there’s generally no limit on the number of members.
• C corps: The business is a separate entity owned by shareholders. Shareholders can be individuals, corporations, institutional investors, or foreign entities, generally without the ownership restrictions that apply to S corps. There’s no limit on the number of shareholders. Corporations can also issue preferred stock, which gives some shareholders different economic rights. That’s what many venture capital investors expect to receive.

Also note that a different tax status, the S corp, has numerous restrictions on ownership. That’s often why startups select a C corp over an S corp if their goal is to raise outside capital.

Stock and investment

Another core factor in making the decision between LLC vs C corp is investment strategy and opportunities. If your business plans to raise outside capital, you need to understand these differences.

• LLCs: Owners of an LLC are called members and have a membership interest in the business. LLCs don’t issue stock. Many venture capital funds avoid investing in pass-through entities, often because of tax issues for their own investors. As a result, LLCs are often not ideal for those seeking institutional investment.
• C corps: Corporations have shareholders, each of whom owns a portion of the business. The corporation can offer different types of stock, including common and preferred, giving each party different rights. This is typically the preferred structure for those seeking angel investment, venture capital, or an IPO.

If your business is looking for venture-backed growth, this is typically the most important factor. Most venture investors expect to invest in a corporation.

Formality and compliance

Other differences exist as well in a C corp vs LLC, including in how they operate.

• LLCs: There’s more flexibility here, with fewer formal requirements. You’ll typically set up an operating agreement, file annual reports where your state requires them, and maintain a registered agent. There is no board of directors required.
• C corps: State law generally requires more formalities for corporations, such as having a board of directors, holding shareholder and board meetings, keeping meeting minutes, adopting and following bylaws, keeping stock records, and filing annual reports. There’s more administrative overhead and often higher accounting costs as a result.

Note that these compliance requirements create boundaries within which your business must run. The individual decisions about each of these areas are up to your business to establish.

Employee equity

Next, consider how employee equity works.

• LLCs: Equity compensation is possible, but more complex. Profits interests are often used, giving the recipient a share of future profits and growth in value. These can be harder to explain to employees and are a more complex structure than stock options.
• C corps: Employees often receive stock options and other equity compensation. This is a familiar process and can be tax efficient. Incentive Stock Options (ISOs), which are only available to corporations, are commonly used to attract top talent.

It’s always necessary to create a structure that aligns with tax rules and legal governance. Speak to a business attorney about these decisions before committing.

What are the disadvantages of a C corp?

There are some disadvantages of selecting a C corp over an LLC for your startup business. The most important factors to consider include:

• Double taxation: Earnings can be taxed twice, at the corporate level and then at the personal level when distributed as dividends. If your small business will distribute most of its profits, this can be costly compared to the pass-through taxation that applies to LLCs by default.
• Higher compliance burden: There’s more admin work involved in maintaining a C corp, including board meetings, minutes, bylaws, stock records, and more complex filings.
• Costs: Accounting costs are often higher for C corps as a result of those more elaborate requirements.
• Distributing profits is less tax efficient: The double-taxation structure can make a C corp less desirable if you plan to distribute your profits to shareholders (owners) instead of reinvesting them.

Also note that state laws differ. For example, Delaware corporations owe an annual franchise tax. If you form a C corp in Delaware for the investor benefits, you’ll pay a franchise tax on top of other taxes, adding to the costs. Be sure you consider your state’s specific rules before making any decision.

Notice that most of these disadvantages weigh most heavily on small businesses and solo founders. If you’re planning to build a much larger business and seeking venture-backed growth, a C corp’s disadvantages may matter less.

Which is better, an LLC or C corp?

Neither is better in all situations. The right answer depends on your goals as a startup or founder, especially your growth plans.

An LLC tends to make more sense when:

• The business is profitable, and the owner wants profits to flow through without double taxation.
• Ownership is simple, with a small number of founders or partners and no plans for institutional investment.
• The business doesn’t plan to raise venture capital or go public.
• Flexibility and lower compliance overhead are priorities.

A C corp tends to make more sense when:

• You plan to raise venture capital or angel investment, since most institutional investors prefer a C corp.
• The business plans to go public, which typically requires a corporate structure.
• Issuing stock options to employees is a priority for talent acquisition (ISOs are only available to corporations).
• The business plans to reinvest profits rather than distribute them, and the 21% corporate rate may be more favorable than the founder’s personal rate.
• International or institutional ownership is involved.

Many venture-backed startups choose a C corp to make fundraising easier. However, if you’re a bootstrapped company or you’re not looking for venture capital, an LLC is often more practical and more affordable.

As always, make sure you speak to a business attorney and CPA about the structure you are considering. If you decide an LLC is the right fit, Tailor Brands can help with LLC formation and, depending on your plan, an EIN, an operating agreement, and registered agent service.

Can an LLC convert to a C corp?

Over time, you may want to change your business structure, moving from an LLC to a C corp. This is not uncommon, and depending on state law, it’s typically done through a statutory conversion or a merger. A conversion may have tax implications depending on how it’s structured, so your CPA can help you with the timing and structure of the change under both federal and state law.

However, if you expect to pursue venture funding within a few months to a few years, establishing a C corp at the start may make sense. Again, it’s wise to speak to your tax professional to compare both options before making a decision.

Conclusion

The C corp vs LLC decision is a big one, and one that can shape how you raise money and attract talent to your business. There’s no simple decision to make, though. Many founders want the simplicity and ease of an LLC, especially if they don’t plan to seek out third-party investors. But a C corp is often necessary when you need venture capital.

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