When starting an online business, two common entity structures are a limited liability company (LLC) or a C Corporation. There are several key factors to weigh when choosing between the two.
Forming an LLC is simpler - you file articles of organization with the state and then create an operating agreement outlining ownership percentages and rules.
To form a C Corp, you must file articles of incorporation and then complete extensive post-filing steps: adopting corporate bylaws, issuing stock shares, holding shareholder meetings, electing a board of directors, submitting IRS form 83-b, etc. The administrative work continues after incorporating.
Overall, LLCs involve much less paperwork to establish.
From a tax perspective, C Corps pay income tax on corporate profits. LLC owners can choose whether to be taxed as a pass-through entity, reporting business income/losses on their personal tax returns. Or LLCs can elect to be taxed the same as a C Corporation.
The potential downside of C Corps is double taxation - the business pays tax on net income, then shareholders pay income tax again on any dividends issued from corporate profits.
LLCs allow owners to avoid double taxation depending on how they file. But consult a tax professional to model the best option based on corporate vs individual income tax rates.
C Corps allow founders and investors to own shares of stock. This makes it easier to raise venture capital and issue shares as compensation. But it also comes with legal requirements like shareholder meetings.
LLCs offer much more flexibility in structuring ownership between members. Single-member LLCs are common for solopreneurs. Multi-member LLCs allow creative divisions based on investment, sweat equity, etc.
C Corporations are required to hold regular shareholder and board of director meetings, prepare reports, keep minutes and corporate records. LLCs have no such requirements, allowing more informal and simplified administration.
A C Corp structure provides the ability to sell shares of stock, making it easier to attract outside investors and venture capital funding. LLCs generally require more complex private arrangements for investors to buy in.
LLCs involve less paperwork, fewer administrative tasks, and offer tax and ownership flexibility suited for bootstrapped founders. But C Corps make fundraising and eventual public listing more straightforward. Assess your goals and resources before deciding which business structure fits best.
If you think either an LLC or C Corp would be a good fit, PeachPay Ignite can help you to form either of them.
PeachPay provides information about business formation, taxes, and related topics for educational purposes only. PeachPay’s content should not be construed as accounting, tax, legal or other professional advice.