Side-by-Side Comparison
| Feature | LLC | Corporation |
|---|---|---|
| Owners | Members | Shareholders (stockholders) |
| Formation document | Articles of organization | Articles (certificate) of incorporation |
| Governing document | Operating agreement | Bylaws, plus shareholder agreements |
| Management | Member-managed or manager-managed | Board of directors elects officers who run daily operations |
| Formalities | Few required | Annual meetings, minutes, board resolutions, stock records |
| Default federal tax | Pass-through (disregarded entity or partnership) | C corporation (entity-level tax) |
| Tax elections | Can elect C or S corporation taxation | Can elect S corporation status if eligible |
| Ownership transfer | Often restricted by the operating agreement | Shares are generally transferable |
| Raising outside capital | Possible, but less common for venture funding | Can issue different classes of stock; standard for venture capital |
Liability Protection
Both structures give owners limited liability. Owners generally risk only their investment, except for personal guarantees, their own wrongful acts, certain unpaid payroll taxes, and veil-piercing cases where the entity was misused. Because corporations have more formal requirements, failing to follow them can be used as evidence for veil piercing.
Taxes: The Biggest Difference
LLC (default)
Profits pass through to the members' personal tax returns. There is no entity-level federal income tax. Active members usually owe self-employment tax on their share of profits. Pass-through owners may qualify for the qualified business income deduction under Section 199A, subject to limits.
C corporation
The corporation pays federal income tax at a flat 21% rate (26 U.S.C. § 11). When profits are distributed as dividends, shareholders pay tax again on those dividends — often called double taxation. Owners who work in the business are paid wages subject to payroll taxes.
S corporation
An S corporation is not a separate type of entity under state law; it is a federal tax election available to corporations and LLCs that meet the requirements of 26 U.S.C. § 1361:
- No more than 100 shareholders
- Shareholders generally must be U.S. citizens or residents, certain trusts, or estates — not partnerships, corporations, or nonresident aliens
- Only one class of stock (differences in voting rights are allowed)
S corporation income passes through to shareholders. Owner-employees must take a reasonable salary, and remaining profits distributed to them are not subject to self-employment tax, which is why some small business owners elect S status.
Management and Formalities
LLCs are flexible. Members can run the business directly or appoint managers, and the operating agreement can set almost any arrangement for voting and profit sharing.
Corporations follow a set structure: shareholders elect the board of directors, the board sets major policy and appoints officers (such as CEO, CFO, and secretary), and officers manage daily operations. State law generally requires annual shareholder meetings, board meetings or written consents, and recordkeeping.
Raising Money
- Corporations can issue common and preferred stock, stock options, and convertible instruments, which is why most venture-backed startups are Delaware C corporations.
- LLCs issue membership interests or units. Pass-through taxation can be unattractive to many institutional investors, and some funds cannot invest in pass-through entities.
Which Should You Choose?
An LLC often fits when:
- You are a solo owner or small group running a service, real estate, or local business
- You want simple administration and pass-through taxation
- You want flexible profit sharing among members
A corporation often fits when:
- You plan to raise venture capital or issue stock options to employees
- You expect to reinvest profits and may benefit from the flat corporate rate
- You plan an eventual public offering or acquisition
Many businesses start as LLCs and later convert to corporations when they raise outside funding. Conversion is usually possible but can have tax consequences, so plan with an accountant.
