We are starting a small business soon and are wondering if we should form an LLC or C Corporation. Any tips?

Question:  My partners and I are starting a new business and are trying to determine if we should form a Limited Liability Company or incorporate as a C corporation.  What are the differences?

Response:   When new business owners consider incorporation, it is important to evaluate the advantages and disadvantages when choosing between a Limited Liability Company (LLC) and a C corporation.  Both of them offer the same limited liability protection for the owners.  This means that the owners are not personally responsible for the debts and liabilities of the business.  Both are separate legal entities and have few ownership restrictions.  The owners are not required to be U.S. residents and the number of owners is not limited.

The major differences between the two are taxation.  C corporations are required to file a corporate tax return showing profits and losses.  C corporations face the possibility of double taxation when profits are distributed to shareholders in the form of dividends.  The shareholders must report dividends as personal income and pay tax on them at the individual level.  While LLC complete a business tax return, the profit or loss of the business is passed through to the owners’ personal tax return.

The formalities required as a C corporation are much more extensive.  The corporation must adopt bylaws, issue stock, hold annual meetings of directors and shareholders and keep minutes of these meetings with the corporate records.  An LLC is not subject to these formalities.  Other differences pertain to selling stock.  A shareholder of a C corporation is not required to get approval from other shareholders before selling stock, whereas a member of an LLC must receive the approval of the other members before ownership can be sold.  Before making a final decision, you may want to seek legal advice from a professional who can address your specific questions.

Answered by Linda Adams

Additional Resources:

• Information Regarding C-Corporations                                   
• Taxation Law Information

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