The right entity depends on how you'll be taxed, how investors enter, and how exits work. An LLC is more flexible, pass-through by default, simpler to operate, and the standard for owner-operated California businesses. A C-corporation is required for traditional VC investors, allows multiple stock classes (preferred / common), and supports the most favorable IPO and acquisition outcomes — but pays corporate-level tax. S-corps are an in-between option for owner-operators wanting payroll-tax efficiency.
Most advisors, especially those without deep familiarity with both the legal and tax sides of incorporation, recommend an LLC over a C Corporation. Often the LLC is the right call. But not always, and any business owner should understand the differences before committing.
The Limited Liability Company is generally said to have better tax treatment because it avoids the "double taxation" of traditional C Corporations. The classic example: a C corp with $1 million of profit pays about $340,000 in federal tax, leaving $660,000. When distributed as dividends, that gets taxed again at 20% (sometimes 15%), an additional $132,000, leaving $528,000 after tax. The same $1 million in an LLC flows through to members at their personal rate, say 40%, leaving $600,000 after tax. The LLC wins by $72,000.
That's the standard pitch. But not every business looks like that.
The California LLC fee. Most states charge an annual fee per LLC. It's not large, but it's mandatory and based on revenue, not profit, in California and a few other states. An LLC with high revenues but minimal profits could pay thousands while a C Corp pays nothing comparable.
Lower brackets at lower profits. C Corps have low tax rates on lower levels of profit, often significantly lower than the 40% personal rate an LLC member would pay on the same income, even after double taxation enters the picture.
The corporation pays the tax itself. Take the $1 million example again. If a C Corp keeps the profit as a reserve or for expansion, the company has $660,000 in the bank with no additional shareholder tax until money is actually distributed. In the LLC, members owe ~$400,000 personally regardless of whether anything was actually paid out, they may owe taxes on income they never touched. In that case the C Corp comes out $60,000 ahead in cash on hand.
Foreign owners. Because the U.S. has a worldwide tax policy, an LLC member who's allocated LLC earnings has to file U.S. taxes including their worldwide income. Even if the additional U.S. tax is small, the reporting work is substantial. A C Corp avoids this problem entirely, even when it actually distributes dividends. For non-U.S. owners, the C Corp is often more attractive even if the total tax is higher.
Default recommendations work most of the time, which is why they're defaults. But the right choice depends on your industry, your revenue and profit profile, your investor mix, and your long-term plans. We'll work through your specific situation in a consultation.
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