The structure, rules, and functioning of Limited Liability Corporations and C Corporations have few similarities and some glaring dissimilarities. But, this article first focuses on the similarity aspects.
To start with, both Limited Liability Corporations and C Corporations are separate legal entities formed by a state filing. Both offer the same extent of limited liability protection to its owners. That is, the owners won’t be responsible for the losses (debts and liabilities) incurred by the corporations in the business. Further, both corporations have little restrictions regarding ownership; the owners can be unlimited in number and there is no mandate that those members must be US residents.
Also, in the case of C Corporations, the owners need not have to be individuals. It can be other corporations as well. Finally, the ownership (membership interest of Limited Liability Corporations and stock of C Corporations) is sub classed, something which is absent in S Corporation.
The differences, on the other hand, exist in the subjects of taxation, certain formalities, transferability of interest, and life span.
In the taxation domain, Limited Liability Corporations are considered a pass-through entity. That is, the income tax paid by the owners of the corporation will have to be proportionate to the profit or loss made by their respective corporations in the previous financial year. On the other hand, C Corporations are separately taxable entities. In other words, the losses and profits for every financial year are taxed directly to the corporation.
The disadvantage with this design is that it leads to double taxation on the dividends, the share that is usually allocated to the owners from the corporate profits.
Regarding formalities, the corporations have to stick to some formalities such as convening board meetings and shareholders meetings every year and keeping a record of all the meeting minutes for future references. But with Limited Liability Corporations, such a restriction is not in place, even though some LLCs tend to follow similar quality processes for enhanced performance sake.
Regarding the transferability of interest, it is far easier to transfer stock in a corporation as opposed to ownership transfer in Limited Liability Corporation. In a C Corporation, the shareholders can sell their shares at their own discretion, without having to tell or seek permission from other shareholders, whereas in Limited Liability Corporations, an owner can think of transferring ownership only on the approval from other owners. Else, it could lead to legal issues.
Finally, Limited Liability Corporations have a certain limited lifespan while corporations’ life – in general – is perpetual. In fact, most states require Limited Liability Corporations to suggest a possible dissolution date in its articles of incorporation itself for the withdrawal or death of a member are sometimes reason enough to dissolve an LLC. Without this, LLCs won’t get the approval to function.