Just like when building a house the foundation for your business provides the framework for success. A business built on weak structure will struggle to succeed. We'll address some of the most pressing issues that you as a business owner must face while constructing the proper framework for your business. Specifically at the end of this course you will be able to: - create and evaluate your company's financial documents; -complete the documents and regulatory procedures to create a legal business entity; - protect your intellectual property; -develop a management team;
C-Corps vs. LLCs: What's the Difference?
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From the course by Michigan State University
Structure: Building the Frame for Business Growth
14 ratings
Michigan State University
14 ratings
Course 4 of 6 in the Specialization How to Start Your Own Business
From the lesson
The Frame: Forming the Legal Entity
By the end of this module, you will be able to explain the difference between C-Corps and LLC entities. You will also be able to use this understanding in order to establish your own business entity.
Meet the Instructors
Ken SzymusiakManaging Director, Burgess Institute for Entrepreneurship & Innovation
Broad College of Business
Forrest S. CarterAssociate Professor, Faculty Director of Institute of Entrepreneurship and Innovation
Marketing
David WheelerCreative Research Faculty, The Hub for Innovation
Media and Information
[MUSIC]
Welcome back to our discussion about incorporation.
We're going to spend this lesson going over the comparisons between the two most
common forms of incorporation in the United States, the C corporation and
the limited liability corporation.
Let's get started.
To get things started, we need to go over a couple of subtleties between
the terminology behind LLCs and C-Corps.
First, there's a subtle difference in what equity owners of these two types of
entities are called.
Equity owners in the Limited Liability Corporation are called members,
while equity owners in the C-Corporation are known as shareholders.
Secondly in an LLC there are no shares of stock that are issued.
There are no equity ownership.
Instead owners of an LLC are described by percentage of ownership.
In contrast, equity owners of a C-Corp are referred to as shareholders
as they have been issued shares of stock to denote their ownership interest.
Of course a simple math equation dividing a number of share owned by the number of
shares issued can also create a percentage ownership calculation for
a C-Corp as well.
So you might be asking what's the difference.
To be honest not much.
But it's important to know the correct terminology as unique to each entity.
And it's important, as a business owner, to understand these key words.
Although there is not much difference between ownership terminology,
there's certainly other differences and
similarities worth covering between these two entities.
The following slides will each cover a particular subject related to
these corporations.
Let's get started.
First things first, let's talk about who controls these types of corporations.
The obvious answer is, owners of the company control the corporation.
But it's a little more complicated than that.
In C-Corporations, control of the company lies with its shareholders.
These shareholders elect other shareholders to serve as directors.
Who in turn hire officers, which also oftentimes are shareholders as well.
Officers are charged with handling the day-to-day operation of the company.
The directors oversee the overall performance of the company,
and have more of a big-picture fiduciary responsibility to shareholders.
And regular shareholders provide direction through voting rights
on who serves as the director.
Although the chain of ownership described above might seem more fit for
a publicly listed Fortune 500 company,
the structure is actually true for all C-Corps, regardless of size.
The difference being that there are much fewer shareholders.
As for LLCs, the company is of course controlled by members.
But similar to C-Corps, the control of the company can also be shared with higher
managers, who might also be equity holders as well.
Next, let's talk about one of the more important differences between
these entities, which is how they are taxed.
C-Corporations by law are considered to be a separate taxable entity and
subject to the payment of federal corporate income tax, and
in some cases even state income tax.
This fact is what creates a situation of dual taxation.
Meaning that not only is the income of the corporation taxed, but
also each individual shareholder must pay income tax on any dividends paid to them.
LLCs are different in this respect.
By default, LLCs serve as a pass-through of profits to the members, so
that the entity itself is not considered a taxable entity.
Therefore, each member is responsible for
his or her proportional share of taxable income on their personal tax returns.
However, it's important to note,
that an LLC may choose to be a taxable entity if the members decide.
Not to sound like a broken record, but
it's these types of subtleties that make it important to consult with an attorney
and CPA to ensure you create a business that is best suited for
your particular life situation and those of your investors if you have them.
Next, let's look at ownership limitations.
Let's start with C-Corporations.
One of the reasons that C-Corporations have popularity,
is that it's quite easy to bring on new equity owners, as there's no limit to
the number of shares of stocks that are permitted to be issued.
This feature makes C-Corps very friendly to the types of companies that may need to
raise multiple rounds of equity funding, as it can certainly speed up the process,
and allows the company to operate smoothly as the board of directors and
officers can still provide company oversight.
LLCs, on the other hand, are allowed to also bring an unlimited number of members
and therefore also an unlimited division of ownership.
But issuing percentages of ownership requires a refilling of the articles of
organization and can become burdens on if ownership decisions are being awarded
on a frequent basis.
Therefore, I always recommend that you think about what type of financing and
ownership distribution will be needed as your company grows.
If you think that you might require multiple rounds of financing with new
equity investors, it might benefit you to consider a C-Corporation
structure to provide ease of ownership expansion.
If, on the other hand, you expect infrequent ownership changes,
an LLC provides an easy distribution of ownership rights.
Lastly, both forms of ownership allow for any type of owner to take equity position.
Meaning that owners in these entities can be individuals,
as well as other types of corporations, including more C-Corps or LLCs.
At this point you're head might be swimming in all these details.
Don't worry, just remember that most companies are generally very simply
structured C-Corps or LLCs.
But it is important to know these particular details that make
each one unique.
Lastly, I want to talk to you about the two documents that are necessary and
important to the formation of your company.
Not surprising, there is yet more similar, but
differently named documents regarding C-Corps and LLCs.
When forming an LLC,
you must file what is known as articles of organization in the state you live in.
When forming a C-Corp, you must file articles in the corporation.
The role of both of these documents is to set up the basics for the corporation,
such as contact information, mailing address, and ownership rights.
These documents are both filed with the state in which the company is registered,
and are part of the public record.
Also, I'd like note that,
in the United States, operating a business in multiple states is permitted, and
does not require you to form a new corporation in each state.
Rather, you must register your company with the state you planted your
business as an out of state entity.
The last two documents we'll cover or considered to be the blueprints for
the each type of entity.
These are the corporate bylaws in the case of C-Corps and
operating agreement in the case of LLCs.
What do they do?
Well, they define how the company runs and operates.
They formalize the structure in the company.
They determine roles and responsibilities.
Oftentimes they describe the powers, rights and capitalization distributions
of stakeholders, including shareholders, members, directors and officers.
And they help settle disputes that may arise among shareholders.
Lastly, these documents are not publicly filed but
rather internal legal documents signed by the owners.
This, of course, changes if the company becomes listed on a public stock exchange.
So what does all this discussion add up to?
Once again the goal is to get you familiar with this types of entities.
Ultimately we highly recommend that you work with an experienced and
trusted attorney to choose the correct business entity that will work best for
your future growth needs as well as your tax situation.
Also don't be afraid.
The reality is that most people make mistakes along the way when it comes to
incorporation.
Remember that mistakes can be corrected, albeit often at an expense, but don't let
perfection get in the way of progress for getting your business off the ground.
You'll learn a lot more setting up your entity that you ever will listening
to me or anyone else talking about this subject, so let's get to work.
[MUSIC]
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