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Should You Form an LLC or C-Corporation?

If you are considering this question, you already have a business concept, a business plan (hopefully), and have done enough market research to ensure that your idea will have some traction and solve some pain point. But, you are unsure of which business entity to choose. Both entity types have their pros and cons, which will be described in detail in this post.

An LLC is a Limited Liability Company. ((Limited Liability Company, Internal Revenue Serv., http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Limited-Liability-Company-(LLC) (last updated Sept. 3, 2013).)) One of the main benefits that an LLC possesses is its ability to choose to be considered a disregarded entity. ((Id.)) By choosing to be considered a disregarded entity, the LLC avoids the so-called “double taxation”… i.e. the income from the LLC will flow through to individual tax returns of the members of the LLC. This is in stark contrast to how corporations are taxed, which is discussed below.

Another benefit is that it is typically cheaper to form an LLC than it is to incorporate. ((See, e.g., Drake Forester, How To Incorporate In Michigan, Northwest Registered Agent LLC, http://www.northwestregisteredagent.com/michigan-incorporation.html (last visited Oct. 17, 2013).)) LLC’s are also typically easier to create because they usually just require articles of organization to submit the filing. ((Id.))

On the other hand, though, LLC’s are not able to raise funds through the issuance of stock. ((Elizabeth Ontaneda, Does an LLC Have a Stock Certificate, eHow.com, http://www.ehow.com/info_7735761_llc-stock-certificate.html (last visited Oct. 17, 2013).)) Not being able to raise funds through the issuance of stock may not be a huge concern right away, but it can be problematic if your business concept takes off and you end up needing additional funding to acquire inventory or other necessities of doing business. Although it is possible to form an LLC and then, at a later date, convert the LLC into a corporation, the process is not very easy and it can have unintended tax consequences if not done properly ((See, e.g., Id.))

A C-Corporation is an entity that is recognized as a separate, taxable entity, different from its shareholders. ((Corporations, Internal Revenue Serv., http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Corporations (last updated Aug. 8, 2013).)) This recognition of the C-Corporation as its own person results in double taxation. ((Id.)) This means that the C-Corporation has its income taxed at corporate rates (first taxation). ((Id.)) Then, the shareholders may receive distributions from the accumulated earnings and profits of the corporation, which the shareholders are then taxed on (second taxation). ((Id.))

C-Corporations are also usually more expensive to create. ((See, e.g., Forester, supra footnote 3.)) Along with the added expense to create a C-Corporation, they also typically require more documents, such as corporate bylaws and initial resolutions. ((See, e.g., Incorporation Michigan Corporations, Northwest Registered Agent LLC, http://www.northwestregisteredagent.com/michigan-corporation.html (last visited Oct. 17, 2013).)) C-Corporations are also required to make annual filings, which carry with them an additional cost. ((See, e.g., Id.))

However, the major benefit to a C-Corporation is its ability to raise funds through the issuance of stock. ((Corporations, supra footnote 7.)) The ability of a C-Corporation to use its stock in trade for funding is great tool to attract investors by offering them a stake in your company for their contribution to capital.

One major benefit to both LLC’s and C-Corporations is the shield from liability they provide. In both business entities, members (of an LLC) and shareholders (of a C-Corporation) typically have no personal liability to repay the debts of the entity and cannot be held liable for actions of the LLC or Corporation. ((Beth Laurence, LLC Basics, Nolo.com, http://www.nolo.com/legal-encyclopedia/llc-basics-30163.html (last visited Oct. 17, 2013).))

In the end, the decision is yours. Both LLC’s and C-Corporations have their pros and cons, and only you can decide which entity will better suit your needs today, tomorrow, and in the future.

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Matthew Caldwell

Vol. 3 Associate Editor

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