C Corporation vs. LLC

How Each Is Taxed

A C corporation is its own taxpayer. Per 26 U.S.C. § 11, it files Form 1120 and pays federal income tax on its profit at a flat 21% rate. If it then distributes any of that already-taxed profit to shareholders as a dividend, the shareholders pay tax on it again, a pattern known as double taxation. An LLC, by default, isn't a separate taxpayer: the IRS treats a single-member LLC as a disregarded entity and a multi-member LLC as a partnership, so profit passes through to the owners' personal returns and is generally taxed only once.

Ownership Structure and Stock

A C corporation can have an unlimited number of shareholders of any type, individuals, other corporations, trusts, or foreign investors, and it can issue multiple classes of stock, such as preferred stock with investor-specific rights. An LLC's ownership is set entirely by its operating agreement, with membership interests instead of stock certificates; this is more flexible in some ways but doesn't offer the standardized, easily transferable ownership instrument that a corporation's stock provides.

Raising Outside Investment

Venture capital funds are generally structured to invest in C corporation stock specifically, since preferred stock terms, liquidation preferences, and employee stock option pools all depend on a corporation's stock structure. An LLC's membership interests don't replicate this the same way, which is the main reason most startups planning to raise institutional capital incorporate as a C corporation rather than form an LLC.

Management and Formalities

A C corporation's state law generally requires a board of directors, corporate officers, and documented annual meetings with minutes kept as part of the corporate record. An LLC has no equivalent default requirement: members can manage the LLC directly, or appoint managers, under rules set entirely in the operating agreement rather than a standard corporate governance structure, making an LLC simpler to run for an owner who doesn't need a board.

Self-Employment Tax vs. Payroll Tax on Owners

An LLC member who's active in the business generally pays self-employment tax on their full share of the LLC's profit. A C corporation shareholder who works for the company is instead a W-2 employee, paid a salary subject to payroll tax withholding; dividends paid on top of that salary aren't subject to self-employment tax, though they are subject to the double taxation described above.

Converting Between the Two

An LLC can convert to a corporation through a state-level conversion filing, a step many startups take before a venture capital round since investors generally require a corporation. Converting involves its own paperwork, fees, and tax consequences, so it's worth choosing the right structure up front when you can reasonably predict your fundraising plans rather than planning to convert later as a routine step.

Which Fits Your Business

An LLC generally suits a business that wants liability protection with minimal paperwork and flexible, pass-through taxation and doesn't plan to raise institutional investment. A C corporation suits a business that plans to raise venture capital, issue employee stock options, or eventually go public, since investors and public markets are built around corporate stock specifically.

State-Level Taxes Can Differ From the Federal Picture

Some states impose their own franchise tax or minimum tax on corporations that doesn't apply the same way to an LLC, or tax the two structures similarly despite the federal differences. Check your specific state's treatment of each structure in addition to the federal rules described here.

Qualified Small Business Stock Is a C Corporation-Only Benefit

Stock in an eligible small C corporation can qualify for a federal tax exclusion on gain under 26 U.S.C. § 1202, once holding-period and company-size requirements are met. This benefit applies only to C corporation stock, not to LLC membership interests, so it's worth discussing with a tax professional if investors or an eventual sale are part of your plans.

This Isn't Tax Advice

Which structure results in a lower overall tax burden depends on your profit level, your plans for distributing versus reinvesting earnings, and whether you're pursuing outside investment. Talk to a tax professional before choosing between an LLC and a C corporation.

Both Still Need a Registered Agent and Periodic Filings

Regardless of which structure you choose, every state requires a registered agent with a physical address in the state of formation, and both an LLC and a corporation typically owe some form of periodic state filing or fee to stay in good standing. Neither structure avoids these baseline state-level obligations.