The C corporation vs LLC (Limited Liability Company) decision is totally dependent upon what you want to achieve. I’ll give you the advantages and disadvantages of both the C Corporation and the LLC, and you’ll have to make up your own mind.
The C Corporation is the traditional corporation. It has the corporate shield that protects the officers, directors, and shareholders from company liabilities. The S corporation has exactly the same corporate shield; it’s just taxed under Subchapter S of the IRS Code instead of Chapter C of the IRS Code. The corporate structure for the C and the S are identical.
Guess what, the LLC has basically the exact same corporate shield too. So the LLC versus C corp decision really doesn’t hinge on the liability protection of the corporate shield.
The LLC has an additional “protection shield” that the corporations don’t have. There is a reverse attack that the LLC protects against. What happens if you are sued personally? That may come in the form of a divorce, deficiency judgment on a bad real estate deal, slip and fall at your house, auto accident on the way to the movie, or any one of dozens of other personal disasters.
The LLCs have “charging order protection,” which the corporations don’t have. I have an eBook out on this protection. It’s How to Double Your Asset Protection. We can’t give this issue true justice here in the LLC vs C corp discussion, but it’s a big deal.
I’ve know a lot more people who have lost their business in a divorce than I have people who have lost their house in a business lawsuit. Charging order protection protects your company form your personal problems.
When you’re making the LLC vs C corp decisions, the corporate shield is the same, but the LLC gives you charging order protection. Keep that in mind.
Taxes C Corporation vs LLC
In the LLC verses C corporation argument, taxes are a non issue. An LLC can be taxed as a C corporation if you file the right papers with the IRS. Simply file for your tax ID number (SS4 form) and then file form 8832 to make your LLC be taxed as a C corporation.
There aren’t many advantages to being taxed as a C corporation. If you want to use some benefit plans, you’ll have to use the C corporation in order for you as the majority owner to be able to participate. The only way you can get money “out” of a C corporation to yourself is to pay yourself a W2 wage or dividend it out, which subjects you to double taxation.
An LLC taxed as an S corporation or a partnership, will give you the same asset protection as one taxed as a C corporation, but you’ll have a lot more flexibility in getting money out of the company to yourself as owner. There has to be a pretty compelling reason before I will let one of my clients be taxed as a C corporation. There are reasons, but not a lot of them.
Because an LLC can be taxed under the tax rules of any other entity that you choose, the choice of whether to use an LLC versus C corp isn’t really an issue.
Ease of Management LLC vs C Corp
A C corporation is probably the most complex business entity structure to manage. When it comes to LLC vs C corp, there is no question, the LLC is easier to manage. The fact that your LLC may be taxed as a C corporation does not mean you have to follow all of the “corporate” formalities of the C corporation to get the asset protection you want.
In fact, you’ve got a lot better chance of getting full asset protection with the LLC taxed as a C corporation than you do with the C corporation itself. There are so many things to “trip” you up in the management of the C corporation that most people can’t do it right and they lose the corporate shield.
On going management is a big factor in your C corporation vs LLC decision.
For the average small business today the LLC vs C corp decision is pretty clear – Go with the LLC. There are overriding reasons to use a C corporation, but they had better be good reasons. “My accountant or attorney said use a C corporation” is not an overriding reason. Why? It had better be a good answer.