LLC vs Corporation: Which Should You Choose?

The two most popular business structures in the US are Limited Liability Companies (LLCs) and Corporations. Both provide liability protection, but they differ significantly in taxation, management flexibility, and ongoing requirements.

Key Differences at a Glance

Taxation: The Biggest Difference

The most significant difference between LLCs and corporations is how they're taxed.

LLC Taxation (Pass-Through)

By default, LLCs use pass-through taxation. This means the LLC itself doesn't pay income taxes. Instead, profits and losses "pass through" to the owners' personal tax returns.

• Single-member LLCs report business income on Schedule C of your personal tax return
• Multi-member LLCs file an informational return (Form 1065) and issue K-1s to members
• You pay income tax once, at your personal tax rate

Corporation Taxation (Double Taxation)

C-Corporations face double taxation:

1. The corporation pays corporate income tax on profits (21% federal rate)
2. Shareholders pay personal income tax on dividends received

This means corporate profits can be taxed at rates exceeding 40% when combining corporate and personal taxes.

Liability Protection

Both LLCs and corporations provide limited liability protection. This means your personal assets (house, car, savings) are generally protected from business debts and lawsuits.

However, liability protection isn't absolute. Courts can "pierce the corporate veil" and hold you personally liable if you:

• Mix personal and business finances
• Fail to maintain proper records
• Undercapitalize the business
• Use the entity for fraud

The protection is essentially the same for both entity types. What matters is how well you maintain separation between yourself and your business.

Management and Formalities

LLC Management

LLCs offer flexibility in how they're managed:

• Member-managed: All owners participate in running the business (common for small businesses)
• Manager-managed: Designated managers run the business while other members are passive investors

LLCs have minimal ongoing formalities. There's no requirement for annual meetings, minutes, or formal resolutions. Your Operating Agreement governs how the business operates.

Corporation Management

Corporations have a more rigid structure:

• Board of Directors: Elected by shareholders to oversee the company
• Officers: CEO, CFO, Secretary appointed by the board to handle daily operations
• Shareholders: Own the company but don't manage it directly

Corporations must hold annual meetings, keep detailed minutes, follow bylaws, and maintain other corporate formalities to preserve liability protection.

When to Choose an LLC

An LLC is typically the better choice when:

• You're a solo founder or small team
• You want simplicity and minimal paperwork
• You don't plan to raise venture capital
• You want pass-through taxation without S-corp restrictions
• You're a non-US resident (corporations can be more complex)
• You want flexibility in profit distribution (not proportional to ownership)

When to Choose a Corporation

A corporation makes more sense when:

• You plan to raise venture capital (VCs strongly prefer C-Corps)
• You want to go public eventually (IPOs require corporations)
• You need to issue stock options to employees
• You want to reinvest profits and benefit from lower corporate tax rates
• You're building a company with complex ownership structures

Frequently Asked Questions