Attorney Thomas B. Burton answers the following question: What is the Difference Between an LLC and a C Corp?
Transcript of Video: What is the Difference Between an LLC and a C Corp?
Hello, I'm Attorney Thomas Burton and today's question is the following: "What is the difference between an LLC and a C corporation?"
This is an excellent question and one that I see come up when I'm working with potential business owners when choosing a choice of entity. So the key thing to remember is both an LLC and a C corporation are entities that are set up at the state level and they provide limited liability protection to the owner by separating the business assets and liabilities from the owner's personal assets.
Differences lie in the ownership structure, governance, and taxes. LLCs are generally easier to set up and have fewer ongoing governance requirements, whereas a C corporation generally takes more paperwork to set up and then after setup, requires maintaining the corporate formalities of a C corporation.
These formalities often involve creating and adopting bylaws, electing a board of directors, issuing shares of stock, holding regular shareholder meetings, keeping meeting minutes according to stock transfers, and issuing reports to shareholders. C corporations are a great type of entity and they've been around a long time, which is why many large corporations choose the C corporation.
If you're looking to be a growth company and take on investors, many investors are going to appreciate the corporate formalities of a C corporation and the familiarity of a C corporation due to the extensive case law on it. However, there is a significant paperwork burden.
So, if you're not the type of person who's good at keeping up-to-date records and paperwork, a C corporation may not be for you. Or if it is for you, you should consider hiring good legal and tax counsel from the beginning who can maintain the corporate books and records for you. Failure to strictly maintain these corporate formalities with a C corporation can lead to the risk of 'Piercing the corporate veil', where someone could sue you and argue that you didn't really have a C corporation, and thus, your personal assets are at risk.
For instance, they've never had shareholder meetings, there are no stock certificates, they mix personal funds with business funds, and there are many examples like this throughout the case law where the corporate veil is attempted to be pierced.
So, the difference and similarity lie in forming both entities at the state level. For an LLC, you file articles of organization, while for a C corporation, you file the Articles of Incorporation. The management and maintenance of the business then differ: C corporations have shareholders, whereas LLCs have members.
For an LLC, it's recommended to adopt an operating agreement. The advantage in Wisconsin is that there's no requirement to issue shares of stock. Although good corporate record-keeping is essential, it's much less demanding than for a C corporation. Additionally, there's no need to hold an annual shareholder meeting or appoint a board of directors for an LLC in Wisconsin.
This is why the LLC has become the most common type of business entity filed in recent decades in Wisconsin. Most small businesses opt for an LLC due to its ease of setup, flexibility, and relative ease of maintenance. With an LLC, you're required to file an annual report with the state of Wisconsin, notifying them that your business is still operational, and this incurs a reasonable $25 annual filing fee.
When considering the type of business to set up, evaluate the nature of your enterprise. If it's a small business like a lawn care business, beauty salon, barber shop, donut shop, or auto repair shop, an LLC might be the right fit. On the other hand, if you're envisioning a tech startup with plans for an app or software, hiring numerous employees, and potentially going public through an initial public offering, a C corporation might be more suitable.
It's worth noting that you can switch from one type of entity to another, but there are often additional costs involved. Therefore, it's wise to think carefully about your business goals and the type of business you're setting up before embarking on your journey.
Thank you for asking this great question, and thank you for tuning in. We'll see you next time.
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