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C-Corporations are the oldest and probably most
common type of large domestic company. Many product and services
that people come across daily are provided by corporations.
And while LLCs (Limited Liability Companies) are a
newer entity type than C-Corporations, they offer unique differences
that the C-Corporation cannot provide (and vice versa), and in
recent years have often become the entity type of choice for newer
and smaller businesses.
One of the primary differences between the two is
from the taxing standpoint. C-Corporations are subject to corporate
income taxes that are completely separate from their owner(s).
Because of this, C-Corporations have a greater and more complex tax
reporting responsibility then most companies.
This differs from an LLC, which passes profits
through to the owner(s), who are then subject to only personal
income tax (i.e. The LLC does not pay federal income taxes to the
IRS, unlike a C-Corporation). This helps avoid double taxation,
which C-Corporations may have to face if they pay dividends to their
shareholders (the corporate income is taxed, and then, if the net
income that is left after taxes is distributed to the shareholders,
it is then taxes at the personal level at the prevailing dividend
tax rate).
A second major difference between LLCs and
C-Corporations is that of the ownership structure. C-Corporations
have sort of a hierarchal structure. Power is divided between
stockholders, who then hire/appoint directors that make the overall
decisions for the corporation, who in turn hire/appoint officers to
run the day to day operations of the company. Stockholders with more
shares are rewarded with more voting influence and profits. While
this is a standard for most C-Corporations, it is not the case with
an LLC.
LLCs are structured essentially like a partnership
(or a sole proprietorship in the case of a single member/married
couple LLC), but with the limited liability protection, similar to a
corporation. Members (the generic term used for the owners of an
LLC) run the company and make all decisions. The division of
ownership, as well as the distribution of the profits (which may be
the same or different from the distribution of ownership) as well as
most other matters are decided by private agreement amongst the
owners.
With an LLC, the owners make the rules in regards to
profit distribution and power. A 5% shareholder could reap larger
profits if the other owners deem it fair. Thus, and this is in
general terms, LLCs are typically a better choice for smaller
companies where only a few principals and workers are involved.
Also, an LLC doesn't need multiple owners to exist;
only one member is required in order to have an LLC by all states.
LLCs are also not required to hold corporate and shareholder
meetings, which are a requirement for C and S Corporations.
They both have their distinct uses. In general
terms, a C-Corporation may be a better choice for a larger entity
with more shareholders, and it is also the best choice if there are
plans to of equity ownership to a larger number of owners, whether
in terms of private placement or taking the company public and
having it listed on a stock exchange.
However, this also means a tiny C-Corporation
stockholder who contributes beyond his or her percentage of
ownership will not be rewarded anything beyond what he or she would
have normally received (unless the shareholder is compensated with
salary or bonuses).
Click here to see which
entity type best fits your specific needs.
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