Corporation vs. LLC

Liability Protection Is Similar for Both

An LLC and a corporation both separate the business's debts and legal liabilities from the owners' personal assets. Per the SBA, owners of both structures are generally protected so that a vehicle, house, or personal savings account isn't at risk if the business is sued or can't pay a debt. This protection isn't absolute in either structure: a court can "pierce the corporate veil" and hold owners personally liable if they mix personal and business finances, skip required formalities, or use the entity to commit fraud.

How Each Is Taxed

This is where the two structures diverge most. Per the IRS, a domestic LLC with two or more members is classified as a partnership by default, and a single-member LLC is treated as a disregarded entity; in both cases, profits and losses pass through to the owners' personal tax returns, and the LLC itself doesn't pay federal income tax. An LLC can instead elect corporate taxation by filing Form 8832.

A standard corporation, often called a C corporation, is taxed as its own entity. Per the IRS, the corporation's profit is taxed once when the corporation earns it, and again when it's distributed to shareholders as dividends, a pattern commonly called double taxation. The corporation doesn't get a deduction for dividends it pays, and shareholders can't deduct any loss the corporation has.

A corporation can instead elect S corporation status, which passes income through to shareholders similarly to an LLC, avoiding double taxation. But per the IRS, to qualify as an S corporation, the business must have no more than 100 shareholders, who must be individuals, certain trusts, or estates; it cannot have partnerships, corporations, or non-resident aliens as shareholders, and it can only issue one class of stock.

Management and Formalities

An LLC is managed by its members or by managers the members appoint, with few state-mandated formalities beyond keeping basic records and, in most states, filing a periodic report. A corporation is managed by a board of directors, which oversees officers who run day-to-day operations. Per the SBA, corporations require more extensive record-keeping, operational processes, and reporting than LLCs, including adopting bylaws, issuing stock, holding director and shareholder meetings, and keeping meeting minutes. An LLC's equivalent governing document is an operating agreement, which most states don't require you to file with the state, though lenders and banks often ask to see one.

Ownership Rules

An LLC's ownership is flexible: members can be individuals, other LLCs, corporations, or foreign owners, and most states don't cap how many members an LLC can have. A C corporation can likewise have unlimited shareholders of any type, which is part of why venture-backed startups are almost always C corporations. An S corporation is the most restrictive: the 100-shareholder cap and the ban on corporate, partnership, or non-resident alien shareholders rule it out for businesses that want outside investment from funds or foreign owners.

Which Might Fit Your Business

An LLC generally suits a business that wants liability protection with minimal paperwork and flexible, pass-through taxation. A C corporation suits a business that plans to raise venture capital or go public, since investors are structured to hold C corporation stock. An S corporation can suit a profitable, closely held business that wants to reduce self-employment tax exposure, but only if its ownership fits the 100-shareholder, U.S.-individual-only rule. Formation itself is similar for both: you file Articles of Organization for an LLC or Articles of Incorporation for a corporation with your state's filing agency, and both need a registered agent at a state street address.

Changing Structures Later Is Possible but Not Simple

You can convert an LLC to a corporation, or elect a different tax classification for either, but it isn't a simple form swap. Converting usually means a state-level conversion filing, new governing documents, and, often, new EIN or tax elections with the IRS. If you're not sure which structure fits, it's usually cheaper to get it right at formation than to convert later.

State Filing Costs Are Comparable

Both structures pay similar state filing fees. LLC Articles of Organization and corporate Articles of Incorporation are typically priced the same or close to it by a given state's filing agency, and both entity types owe a registered agent at a street address in the formation state. See our guide on how much it costs to form an LLC for a state-by-state fee range; corporate filing fees generally fall in a similar range.

Investors Usually Expect a C Corporation

If you plan to raise money from venture capital funds or issue stock options to employees, most investors expect a Delaware C corporation specifically, since their fund structures aren't set up to hold LLC membership interests or S corporation stock. If outside equity funding is part of your plan, factor that into the structure decision early, since converting after you've issued LLC membership interests to early investors adds complexity.

Self-Employment Tax Is a Common Reason to Consider an S Corporation

LLC members typically pay self-employment tax on their full share of the LLC's profit. An S corporation election can let an owner split income between a salary, subject to payroll tax, and a distribution, which is not. This only works within IRS reasonable-compensation rules, and getting it wrong creates audit risk. This is a tax strategy decision, not a legal one, so talk to a tax professional before electing S corporation status for either an LLC or a corporation.