Each new day, we, Miletti Law®, endeavor to keep you, our unusually motivated® readers, informed and enlightened about issues that affect you and/or your businesses. As the authoritative force in Employment and Labor Law, we are accustomed to exploring both familiar and uncharted waters, particularly concerning issues that most people find challenging to comprehend. One of these issues, as covered in the video accessible through the link provided at the end of this blog, regards the distinction between a  Standard Corporation (C-Corp.) and a Limited Liability Corporation (LLC).

As a preliminary, let’s consider a very typical scenario that has been encountered by most people. Whenever you engage yourself in the process of acquiring a piece of investment property, you always want to set it up in the most appropriate manner and have the best legal structure possible. Ideally, you’ll want to do more than simply put your name on the piece of investment, because you want to treat it as a business. It might be a residential home, but, as an investment, it’ll largely be a source of income, irrespective of the fact that it remains a livable and personal asset for you. By the end of the day, the primary goal is to reap the most benefits and have the least degree of risk.

You might have heard someone say that they want to open up the LLC. Well, what is it about the LLC and what do they want to do with it that a C-Corp. cannot do? Unfortunately, the answer to this and similar questions related to how different a C-Corp. is from the LLC remains unclear to many people. While we endeavor to take a more practical approach in our explanations and discussions, it’s our hope that by the end of the video and this blog, you’ll have been better informed and armed with the most relevant information you’ll need regarding the difference between a C-Corp. and the LLC.

That being said, let’s now go through the Miletti Law® quick guide to understanding how a C-Corp. differs from the LLC and vice versa.

To do this, we need to formulate the issue first. We’d like to know what would be the best corporate structure that could facilitate the types of transactions involved. In this case, the issue would simply entail which option, between a C-Corp. (C Corporation) and the LLC (Limited Liability Corporation), is the best for you.

Issue: You are looking to understand the difference between a C-Corp. (Standard Corporation) and the LLC (Limited Liability Corporation)

To address this issue and, ultimately, provide a distinction between the two options, we’ll formulate six categories that you ought to consider before making a decision. Let’s now look into each of the categories.

Limited Liability

When it comes to limited liability, there’s no difference between a C-Corp. or the LLC. By way of backdrop, limited liability implies that the involved person cannot be held liable for what happens to a corporation. In layman’s language, limited liability means that one is not liable for the faults of the corporation. Although we are focusing on how the two options differ, it’s crucial to understand that both are corporations and, therefore, have limited liability. Unless you engage in nefarious or criminal acts that pierce the corporation’s veil, you’ll have limited liability irrespective of what you do to the business or corporation.

Tax Considerations

On the federal level, both the C-Corp. and LLC have very similar tax structures. In both, the first layer of taxes is the federal tax. However, in States like New York, you get to pay both state and federal corporation taxes. Notably, the state tax is slightly higher for the LLC. Nonetheless, the variation in the level of taxes may be insignificant for both. A good accountant would be fine in either situation.

Fees

When it comes to fees, things tend to be a little more expensive with the LLC as compared to the C-Corp. In order to open the latter, you need an investment of not more than $200. However, in order to open the former, you might need approximately $250. For both, these are the fees as long as you need certificate of existence and certified copies to come along with the option. However, this difference is also insignificant at the end of the day.

Formation/Ownership Structure and Manner of Operation

When it comes to formation and operating agreements and structure, the central distinction between a C-Corp. and the LLC entails the degree of freedom you have to allocate responsibility and corporate rules. As compared to a C-Corp., the level of control one has in the LLC is greater because of the sophisticated agreements involved. Thus, the degree of control you might have over corporate formation and documentation is the most significant difference between a C-Corp. and the LLC. It is also worth mentioning that when it comes to a C-Corp., everything is controlled and governed by a statute, such that you’re allowed a given number of shares that don’t change unless the formation documents of the Corporation are amended to account for the differences. Furthermore, Corporations by their statutory nature, are very rigid and firm with definite periods of existence, long history of litigation and case law, and compliance factors. On the other hand, LLCs are relatively newer and their popularity began growing in the 90s. Additionally, the LLC’s structure, which is often more complex, enables the managing body to have a greater degree of control over the operation and documentation internally amongst its members. This means that the structure of the LLC gives you more liberty to control things as opposed to a C-Corp.

Duration and Existence

The duration and existence of both a C-Corp. and the LLC can be described as perpetual, which means that, all factors held constant, a corporation could last forever. However, it’s possible to set a death date during the formation of the LLC, which means that it could have a life cycle. For instance, you could set the death date to be after 10 years because the task the LLC is expected to perform is limited.

Issuance of Stock and Ownership Issues

Based on our experience, it’s easier to handle ownership, issuance of stock, and daily operation and control issues in the LLC than a C-Corp. We have, in the past, encountered cases where people want to bring on their family members into corporations, but they couldn’t because it’s necessarily hard to breakdown the stock issuance at the very beginning. For example, like most other Americans, New Yorkers use the standard language of 200 shares, which is the default number of shares you get online when you need to open a C-Corp. This issue may bring problems later on when an individual wants to bring in their family members and split the shares. Assuming that, while this individual wants to bring in two family members, these shares have already been split among three existing members of a corporation, it’s not possible to reallocate the shares without filing for some sort of amendment on the statute that modifies the available shares for the C-Corps. However, the LLC doesn’t involve such issues because the question regarding the amount of shares never even appears during documentation and formation. This is really something that you could just handle internally in the LLC.

In a nutshell, the LLC is more suitable for complicated business transactions because it provides for a greater degree of control regarding how you run daily operations, allocate funds, and collect money. However, this also makes the LLC more sophisticated to run. At the end of the day, the big question regards which option is the best for you. For us, if you need flexibility and a more dynamic business structure where you’ll have more control over things, then the LLC is the best option for you. Otherwise, you need a C-Corp. if your business is smaller, has a less dynamic structure, no heavy investment required, and only little capital is available at your disposal.

As usual, we invite you to review and explore the video through the link provided below. In the interim, if there are any questions or comments, please let us know at the Contact Us page!