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LLC vs. Corporation: Key Differences and How to Choose

Priyanka Prakash, JD

Senior Staff Writer at Fundera
Priyanka Prakash is a senior staff writer at Fundera, specializing in small business finance, credit, law, and insurance. She has a law degree from the University of Washington and a bachelor's degree from U.C. Berkeley in communications and political science. Priyanka's work has been featured in Inc., Fast Company, CNBC, and other top publications. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.
Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

When starting a small business, one of the most important decisions you’ll make is how to structure your business entity. Small business owners commonly choose to structure their companies as LLCs or corporations. In a survey by the National Small Business Association, 42% of businesses were S-corporations, and 23% of businesses were limited liability companies (LLCs).

Your choice between LLC vs. corporation will impact two things that are paramount for any small business owner—your money and time. Your tax burden, ability to raise money from investors, and the ease with which you can expand in the future depend in part on your business entity. The LLC vs. corporation decision also impacts the time you spend informing your business entity and maintaining your business in good standing.

Learn the similarities of corporations and LLCs, the differences, and how to figure out which one is best for your company. You’ll also hear from small business owners like you on why they chose one structure over the other.


LLC vs. Corporation: The Similarities

LLCs and corporations are similar in a couple of ways. Both types of businesses are registered business entities, which means that you have to form the business through your state’s business filing agency. And both offer the advantage of limited liability for owners.

Registered Business Entities

If you were to up and start a business tomorrow, you would not be an LLC or a corporation. By default, businesses are either sole proprietorships, if there’s only one owner, or partnerships, if there are multiple owners.

To form any type of business, you must first obtain required business licenses and permits. Forming an LLC or a corporation takes a few extra steps. You have to file formation paperwork with the business filing agency in the state where you operate. That process is called incorporation for a corporation and business registration for an LLC. Your corporation or LLC exists only after you file the right paperwork and the state accepts it.

Limited Liability Protection

As registered business entities, LLCs and corporations both offer one big advantage—limited liability for owners. Limited liability means that, in the ordinary course of business, owners are shielded from  personal liability for the debts and obligations of the business.

For example, say you own a delivery company, and a customer loses profits because you deliver a package late. If you’ve organized your business as an LLC or corporation, then the customer can’t sue you personally or come after your personal assets. They can only sue your company and recover from your company’s assets. However, if you have a sole proprietorship or general partnership, then your personal assets would be fair game.

For this reason, once they start generating solid revenues, most sole proprietors and freelancers “upgrade” to an LLC or corporation to get limited liability protections. That said, you can’t depend on limited liability all the time. For example, if your company acts negligently or if you sign a personal guarantee on a loan, then you’re personally on the hook no matter what kind of business entity you have.

llc vs. corporation

LLC vs. Corporation: Key Differences

The LLC vs. corporation decision might seem a little murky so far since there are important similarities between the two types of business entities. But the differences is what matters most for your business. LLCs and corporations differ in terms of formation, ownership, taxes, and governance requirements.


When forming an LLC, you first have to file a document called the articles of organization with your state’s business filing agency. The articles of organization contain basic information about your LLC, such as the LLC’s name, address, and the names of the LLC’s owners. After filing your articles of organization, the best practice is to draft up an LLC operating agreement. An LLC operating agreement is like a blueprint for your business and sets out the partners’ respective shares in the business, as well as their rights and responsibilities.

There are two types of corporations—S-corporations and C-corporations. In either case, you start by filing articles of incorporation with your state’s business filing agency. Articles of incorporation contain basic information about the company, such as the company name, company address, and the number of shares. After filing your articles of incorporation, you have to take a series of steps to complete the setup process that aren’t required for LLCs. You’ll need to create corporate bylaws, elect a board of directors, hold the first board meeting, hold the first shareholder meetings, and issue shares of stock.

Ownership and Raising Money

A corporation has a more complicated ownership structure than an LLC, but is the preferred structure if you plan to raise money from investors in the future.

In a corporation, responsibility is divided among three parties—shareholders, directors, and officers. Shareholders own stock in the company. Shareholders elect a board of directors, who engage in long-term strategic planning. The directors appoint officers—such as the CEO, CTO, and CMO—to run the business on a day-to-day basis. It’s entirely possible to have a one-person corporation, where the owner is the sole shareholder, director, and officer.

The owners of an LLC are called members. You can have a single-member LLC with one owner, or a multi-member LLC with multiple owners. In some multi-member LLCs, called member-managed LLCs, all members participate in running the business on a day-to-day basis. In other LLCs, called manager-managed LLCs, members appoint one of the members or an outside individual to manage the business.

In most cases, investors prefer to work with corporations over LLCs. Stock in a corporation is designed to be easily distributed to investors, and investors can easily retain their interest in the company by holding onto stock or divest their interest in the company by selling off stock. C-corporations also allow for different classes of stock to incentivize venture capitalists and angel investors. It’s certainly possible for an LLC to attract investment, but it’s much harder, and many investors insist on working only with corporations.


One of the biggest differences between corporations vs. LLCs has to do with taxes. A C-corporation is subject to corporate income tax. The owners of an LLC can choose to have the business taxed as a C-corp or as a pass-through entity. Owners of pass-through entities pay taxes on business income on their personal tax returns.

Many entrepreneurs steer clear of C-corporations due to double taxation. For a C-corp, business income gets taxed once at the corporate level, and then shareholders get taxed again on their personal tax returns if they receive dividends from the business. The only way to avoid double taxation is to reinvest all profits back into the business, minus what you take out to cover a reasonable salary.

An LLC offers more tax flexibility than any other type of business. The owners of an LLC can decide whether the LLC should be taxed as a C-corporation or as a pass-through entity. If you choose to be taxed as a C-corporation, then taxes will be no different from a standard C-corporation. If you choose to be taxed as a pass-through entity, then you’ll report your share of business income on your personal income tax return. You’ll pay taxes on that income at your personal income tax rate.

llc vs. corporation

New Tax Changes Coming in 2019

Starting with the 2019 tax season (covering the 2018 calendar year), the tax implications for LLCs, corporations, and other types of businesses will change. This is the year that the Tax Cuts and Jobs Act (TCJA)—which you might know as the Trump tax plan—takes effect.  

The TCJA changes the corporate tax rate on C-corps to a flat 21%, down from a range of 15% to 35%. The dividend rate is unchanged, and you’ll still get hit with double taxation if you distribute dividends. Owners of pass-through entities will be able to claim a 20% deduction on business income. Limits apply based on the income level and type of business, but for many LLCs and C-corps, the TCJA will mean a reduction in taxes.

LLC vs. Corporation Tax Example

Let’s say you own a retail shop that generates $200,000 in business profits this year, and you have one business partner with whom you equally share the business. If you have a C-corporation, you’d end up paying the 21% corporate tax rate on the profits, or $42,000. Then, if you took $50,000 out in dividends, you’d pay a dividend tax rate (15% for most people) on that amount, which equals to $7,500 in this case. For each partner, the tax burden ends up being $28,500.

Now assume that you have an LLC taxed as a pass-through entity. You and your partner would each pay taxes on half of the business income—$100,000—on your personal tax return. Under 2018 tax brackets, your tax rate would be 24%, bringing your tax bill to $24,000. In this example, the tax bill is slightly lower for an LLC vs. a corporation.

Ongoing Governance and Paperwork

Ideally, after forming a business, you could just focus on day-to-day tasks like marketing and hiring. But to maintain your LLC or corporation, there are ongoing government requirements that you need to satisfy. These requirements are more onerous for owners of corporations.

Corporations typically need to do all of the following post-formation to remain in good standing with the state:

  • Create, adopt, and follow corporate bylaws (and update when necessary).
  • Elect a board of directors and hold regular board of directors meetings.
  • Hold regular shareholder meetings.
  • Document meetings with meeting minutes.
  • Issue stock certificates.
  • Record stock transfers.
  • Provide periodic reports to shareholders.

In most states, with the exception of creating an LLC operating agreement and filing an annual report, none of these formalities are required of LLCs. It’s recommended that LLCs maintain documentation of each member’s equity interests and hold regular member meetings, but it’s not required to keep your company in good standing.

Since LLCs have fewer formalities, they generally owe lower fees to the state annually and are able to get by with lower accounting fees and legal fees.

llc vs. corporation

LLC vs. Corporation: How to Choose

Now that you know the differences between a corporation vs. LLC, it’s time to see how those differences apply to your business and make a decision. A business attorney or tax professional is the best qualified person to go through your books and financial statements and determine what’s in your business’s best interest.

That said, here are general things to keep in mind when choosing an LLC vs. corporation:

LLC Advantages

  • Flexibility to choose how you’re taxed (you can avoid double taxation)
  • LLCs usually pay lower annual fees.
  • Fewer governance requirements

Corporation Advantages

  • Easier to raise money from investors and make an initial public offering
  • You can offer stock options to incentivize employees and attract talent
  • Bankers, judges, and investors are more familiar with corporations

LLC Disadvantages

  • More difficult to raise money from investors

Corporation Disadvantages

  • Corporations get hit with double taxation if dividends are distributed
  • Corporate governance requirements can be time consuming and expensive

Deborah Sweeney, CEO of business filing service and a Fundera Ledger contributor, says that a company’s growth potential is the key to helping you decide. She says:

“Many industries are great fits for LLCs and corporations. One of the key differences is growth. If you know you’d like to keep a company small and independent, for instance, you may incorporate as an LLC for more flexibility. If you know you want to expand the company and take it worldwide, it makes more sense to incorporate as a corporation so you have a structure in place to accept money from investors.”

Most small business owners who we asked thought about the LLC vs. corporation decision in the same way. Business owners preferred the simplicity and tax flexibility that comes with LLCs, but structured as corporations if they wanted to raise money from investors.

These business owners opted for an LLC:

I have owned several small businesses. I learned, from experience, that an LLC is much easier when it comes to bookkeeping and paperwork. It gives you the protection against your personal assets just like a corporation, but you don’t have to jump through all the government hoops. You do have to pay an annual state fee… I justify the annual fee under what your time is worth.”

—Julie A. Eaton, CEO/managing broker at Eaton Realty Advisors

“I‘m a single-member LLC formed in Maryland. I made the decision to form an LLC because the organization process was quick, easy, and inexpensive. One of the considerations I made in not forming a corporation was the creation of a board of directors. I really did not want to have to do that, nor did I want to be obligated to convene an annual meeting. But the tax advantage is what I found most attractive. Operating an LLC, I’m taxed at the personal level only, whereas if I opted to form a corporation, I would be taxed at the business and personal levels.”

—Arnettia Wyre, CEO of conflict resolution business LAKE Solutions LLC

“One reason I chose an LLC over a corporation is because, in my state, New Jersey, the annual filing fee for an LLC is only $50/year. However, the annual filing fee is $500/year for an S-corp or C-Corp. Another reason is that corporations necessitate a more complex tax return. This substantially increases tax filing fees if you have an accountant or tax counselor do your taxes. It also increases the chances you’ll make a mistake if you try to prepare your taxes on your own.”

—Eric Bryant, CEO of media company Gnosis Media Group

This business owner opted for a corporation:

“We originally started as an LLC. There are a lot of benefits to being an LLC, the main is that it’s just plain simple. But we converted to being a C-corp when the business grew and outside investment opportunities came into question. If you ever want to engage with outside investors, especially VCs, being a C-corp and incorporated in Delaware is a must.”

—Artem Volos, co-founder of ed-tech startup ClutchPrep

Setting up Your LLC or Corporation

Once you decide between an LLC vs. corporation, you must actually set up your business so you can start serving customers and making money. The quickest route is to set up your LLC or corporation on your own by contacting your state’s business filing agency, but most businesses like a little bit of help along the way.

Sites like LegalZoom and Rocket Lawyer will incorporate your business or register your LLC for a flat fee, typically around $150 or less. If you want guidance through every step of the process, then you can also hire a business attorney to establish your LLC or corporation. A business attorney will walk you through the pros and cons of each type of business entity, give you personalized advice, and help you file all the right paperwork.



Corporation vs. LLC: The Choice Depends on Current Constraints and Future Goals

Ultimately, the choice between an LLC vs. corporation comes down to your patience for paperwork and governance requirements, your tax bill, and your future goals. For most small businesses, the simplicity and ease of an LLC works. You don’t have to worry about double taxation, and you don’t have as much paperwork to submit and government rules to follow.  But if you think you’ll be raising venture capital in the future, then it’s a good idea to set up as a corporation now. Switching entities down the line is possible, but expensive, so it’s best to make this decision now and stick to it.

Priyanka Prakash, JD

Senior Staff Writer at Fundera
Priyanka Prakash is a senior staff writer at Fundera, specializing in small business finance, credit, law, and insurance. She has a law degree from the University of Washington and a bachelor's degree from U.C. Berkeley in communications and political science. Priyanka's work has been featured in Inc., Fast Company, CNBC, and other top publications. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.