Outright LLC Vs. C Corp for Startups

by Terry Lane

A startup can have many needs, some of which might be better met if structured as a limited liability company, or LLC, and others if the business is registered as a standard C corporation, or C-corp. In both cases, incorporating helps shield an individual from a corporate liability, like a lawsuit or foreclosure. In general, an LLC offers a small business, like a sole proprietorship, corporate protections while preserving the management, tax and financial flexibility of the self-employed. However, startups that have the goal of going big may need to consider the corporate financing available to a C-corp.


Both LLCs and C-corps have advantages and drawbacks, and which is better depends more on the size, goals and scope of the startup. A key consideration should be financing. According to the Startup Law Blog, the C-corp offers more ways to bring in investors, such as with common or preferred stock. The drawback with stocks is that they also represent an ownership interest and can lead to owners' selling some control of the company in exchange for funding. LLCs can be in a better position to be granted a loan because an LLC "member," such as an owner-operator, can put up a house or real estate as collateral for the loan.

Stocks and Membership

The main advantage of a C-corp over other small business organization types is that it can issue different classes of stock, including convertible preferred stock, which is crucial for attracting venture capital and other institutional investors. Preferred stock has priority over common stock for a corporation's assets, which means these investors would be paid first from what is left of a company's assets if it were to fail. LLCs can't issue stock. LLCs have membership interests, which denote a share of ownership in the company, but there are usually restrictions on how they can be transferred and they aren't priced and sold like stocks.

Tax Differences

The Internal Revenue Service defines LLCs as "pass through" entities, where the profits "pass through" the company and go directly to the members, who pay income taxes on it. LLC members are also responsible for self-employment taxes. However, C-corp taxes can be more complicated. For example, a single-owner business that forms a C-corp would pay corporate taxes on the profit. If the owner pays himself a salary, it would be subject to income tax. If, after a good year, the owner wanted to take additional profits from the corporate account, or doesn't pay himself a salary, he would have to issue a dividend on his shares, which are taxed as capital gains. This results in double taxation.

Ownership Structures

An LLC requires less paperwork and is generally easier to set up than a C-corp, according to the Small Business Administration. To form an LLC, a business owner files "articles of organization" with a state government office, usually the secretary of state, and pays a fee. Articles of organization require only basic information like company name, address and primary company official. All other LLC organizational details are laid out in an operating agreement, which is not legally required in most states. To form a C-corp, the owner pays a fee and files articles of incorporation and corporate bylaws with the state. These documents establish stock issuance and ownership, corporate boards of directors, committees, officers and other entities that control the actions of the corporation and are required by law.

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