Don’t Be Confused, Read This
Ever try to research the difference between LLCs and C-Corps (or S-Corps) to figure out which structure is right for your business? Yea… really confusing right? Information online can send you down a crazy rabbit hole that results in more questions than answers. Well, I learned that you CANNOT rely on the Internet for reliable information about this sort of thing. It’s confusing AF and can end up costing you a chunk of cash if you set it up the wrong way in the beginning (which I did btw).
The one thing I did learn for certain is that you definitely, DEFINITELY should talk to a start-up lawyer and depending on your business, try to find a lawyer that has experience working with businesses like yours. Lots of lawyers will tell you that they have experience with start-ups and business formation documents but you can’t always trust this answer. Helping someone start an e-commerce business versus a technology start-up is a totally different thing! Trust me on this one. Also talk to your accountant – this is a critical step!
Here’s the deal on LLCs and C-Corps, or at least what I’ve learned so far (and again, by no means am I a lawyer):
- Biggest difference with C-Corps is the double taxation. They are taxed on the corporate level and then shareholders are taxed on any dividends the corporation distributes on their personal income taxes.
- LLCs are not taxed as a separate business entity and all profits and losses pass through to individual members, which is why from a tax perspective LLCs can be SO CONFUSING!
- If you have a single-member LLC, it is treated like a sole proprietorship for tax purposes or what tax people call a “disregarded entity”, which means the LLC’s income taxes are reported with your personal income taxes.
- If you have multiple members, the LLC will be taxed as a partnership unless you elect to be taxed as a corporation (your accountant should know all this and will do this for you). Taxed as a partnership means the business doesn’t pay taxes but members pay taxes on any distributed profits. How profits get distributed is outlined in your Operating Agreement (check out this post for more on LLCs and Operating Agreements).
- You also have extra tax filings to complete – talk to your accountant on this one. It’s a scary world. You have to prepare K-1 statements for all your shareholders for their own personal income taxes. This can be annoying… and a lot of work.
- C-Corps are good for growing quickly. Most C-Corps are incorporated in Delaware. Why you ask? Delaware is a very corporation-friendly state and there are decades and decades of case law as precedent for any lawsuits. Venture capitalists and all investors really love C-Corps.
~ Contributing WMN Member
Disclaimer: The above article was not written by a lawyer and not intended to be used as legal advice. Starting a business? Have Questions? Talk to a real lawyer! See how WMN Legal can help.
Posted In: Legal Tips