LLC or C-Corporation?

 Ready To Take Your Business To The Next Level?

“Knowing that things could be worse should not stop us from trying to make them better”

-Sheryl Sandberg, COO, Facebook-

So you have a great idea for a business and you are excited about it.  You decide to step out and start that business as you are confident that customers are just waiting for your product or service. 

Perhaps, you did your market research and have identified your target market so what else can possibly stop you from achieving your success?

Operating a successful business takes much more than offering a service or selling a product and receiving payments for it.  Understanding the difference between gross revenue and actual profit or managing cash flow, is really important to know.

Laying the right foundation from the start can make the difference in the future longevity and sustainability of the business. You need a strategy or blueprint that’s laid out with clear directions and a path for where you are heading.

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Business Formation:

There are a few options to consider when making the decision to officially form a business.  Currently, the Limited Liability Company (LLC) is quite popular among entrepreneurs.  For one owner, there is the single member LLC.

For more than one owner or partners,  there is the multi-member LLC, which generally defaults as a partnership.  Another option for forming a business is the Corporation (C-Corp), which may require more formalities and its owners are shareholders.  Limited Liability Company (LLC) | Internal Revenue Service

There are some advantages of forming a business as an LLC or Corporation such as

•  Protection of your personal assets in case of a lawsuit.
•  A higher level of legitimacy as a business
•  Better opportunities to raise capital or to attract investors.

Before making the decision as to which business formation to choose, there are some important factors to consider.  Too often entrepreneurs are eager to take the plunge to make the business official, as they want to be taken seriously. 

That is a great step in the right direction, particularly as there are quite a few advantages to doing so.  The key is to do your due diligence before signing on the dotted line.

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Structure

A C-Corp is structured and governed by three levels of leader which are:

1. Shareholders – Purchases stocks as investments thus owning the company
2. Directors – Run the company
3. Officers – Handles the day-to-day operations of the company

An LLC on the other hand, is governed by an operating agreement that is drafted by the members.  For tax purposes, LLC’s are considered a “pass-through entity” where the entity itself does not pay federal income taxes. The profits & losses are passed through to the members and reported on their personal tax returns. 

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Accounting, Reporting & Taxes

Accurate record-keeping is essential to effective business management; however, it is an area where some business owners can fall short.  Keeping up with customer demands usually takes priority. After all, happy and paying customers guarantees revenue.

A wise move is to hire an accountant or outsource to an accounting professional as early as possible so that your books can be set up accurately. 

Banks or Investors are more likely to grant loans or invest in your business when you are able to produce financials. Numbers are important.

Depending on your choice of business formation, you may be required to file annual reports.  Incorporated businesses such as C-corps must file reports with the Secretary of State. 

A registered agent can be used to file the report on behalf of your company. 

Financial reports for an LLC are less exhaustive than that of the C-corporations, which is a key factor to consider when forming.  Also, the LLC’s are easier to form than the C-corps.

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Let’s talk a little bit about taxes. This is the most underestimated or overlooked area for some as they embark on forming their business.

It may seem like the least important but on the contrary, it plays a huge part in the decision making process.  For example, the S-Corp is a designation for tax purposes.

An LLC can make an election to be treated as either a  C-Corp or an S-Corp for the benefit of not having to pay the self-employment taxes (social security & medicare). If they elect to take a salary, then the corporation pays the payroll taxes.

Oftentimes when tax season comes around, some small business owners go into a state of panic when they are made aware of having to pay self-employment taxes. 

Making quarterly estimated taxes will reduce the risk of incurring a penalty for underpayment of taxes. 

It is highly recommended that before getting into business, take the time to research and make sure that you are aware of the tax obligations on the federal level as well as that of your state.

These are just some of the key things to guide you along your path to starting your business and steering it in the right direction. 

The more you know, the more empowered you will be and your business is more likely to achieve sustainability when you take the time to do your due diligence. 

A great place to start when seeking resources to start your business is at the IRS’s Small Business Center. 

Understanding the tax responsibilities that come with starting a business | Internal Revenue Service

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Key Takeaway Points

• Research the advantages and disadvantages of the different forms of business structure.
• Implement a bookkeeping system or seek assistance from an accounting professional.
• Take time to understand the tax obligations that are applicable for your business.
• Stay abreast of annual reporting and other compliance requirements.
• Network and form alliances with other businesses or professionals in your industry.

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About The Author

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