LLC vs corporation
The difference between LLCs and corporations isn't subtle — different ownership, different tax defaults, different compliance, different equity. Here's how to pick.
| Feature | LLC | Corporation |
|---|---|---|
| Owners called | Members | Shareholders |
| Management | Members or appointed managers — flexible | Board of directors + officers — formal |
| Default taxation | Pass-through (single → Schedule C, multi → 1065) | C-corp: 21% federal corporate tax + dividend tax on distributions. S-corp election available. |
| Self-employment tax | Yes on active owners' net earnings | No — owners are employees paid via W-2 |
| Ownership rules | Anyone (including non-US persons, other entities) | C-corp: anyone. S-corp: US persons only, ≤100 shareholders, one stock class |
| Stock & equity | Membership interests, custom profit splits, no formal stock | Common + preferred stock, options, vesting — what investors expect |
| Raising VC capital | Possible but unusual — most VCs require a Delaware C-corp | Standard — Delaware C-corp is the default |
| Compliance | Annual report in most states; light | Annual report, bylaws, board minutes, stockholder records |
| State filing fees | $40–$500 to form | Similar range; often slightly higher |
Difference between corporation and incorporation
The two get confused constantly. A corporation is the entity — the legal person that exists once the state accepts your filing. Incorporation is the act of creating it by filing Articles (or a Certificate) of Incorporation with the Secretary of State. You incorporate to form a corporation.
People also use \"incorporation\" loosely to mean any business formation, but technically LLCs aren't \"incorporated\" — they're organized by filing Articles of Organization. Different document, different chapter of state law, different default rules.
When LLC wins
- You're bootstrapping or self-funding — no outside investors needed.
- You want pass-through taxation and flexible profit splits.
- You want minimal ongoing compliance.
- You're a non-US founder — LLCs handle foreign ownership cleanly.
- You're holding assets (real estate, IP, portfolio of websites).
When corporation wins
- You're raising priced venture rounds — Delaware C-corp is the default.
- You're granting stock options to employees with vesting.
- You're planning toward an IPO or strategic acquisition.
- You need a formal board structure to govern multiple stakeholders.
Still unsure? Read our deeper guides: LLC vs C-Corp and S-Corp vs LLC.
Taxation, deeply explained
The single biggest reason founders pick one entity over the other is taxes, and the answer changes as your profit grows. Here's the actual mechanics rather than the marketing version.
LLC default — pure pass-through
By default the IRS doesn't even recognize an LLC as its own tax entity. A single-member LLC is a "disregarded entity" — profits and losses land on your personal Form 1040 Schedule C, exactly like a sole proprietor. A multi-member LLC files an informational Form 1065 partnership return, which issues a K-1 to each member who then reports their share on their personal return. The LLC itself owes no federal income tax.
The catch: active LLC owners pay self-employment tax (15.3% — Social Security + Medicare) on top of income tax on their share of profits. On $80,000 of net profit that's roughly $11,304 of SE tax before you've calculated a single dollar of income tax.
S-corp election — the self-employment tax saver
Both LLCs and corporations can elect S-corp status by filing Form 2553. The mechanic that matters: you become a W-2 employee of your own company, paying yourself a "reasonable salary" subject to payroll taxes, and take the rest of profits as distributions that are not subject to self-employment tax. On the same $80k profit, paying yourself $45k salary and taking $35k as distribution saves roughly $5,355 in SE tax — minus payroll-processing costs (~$600/year) and a more complex tax return (~$500–$1,500 to file).
Rule of thumb: the math starts working around $40–50k of net profit and gets dramatically better at $80k+. Below that the payroll overhead eats the savings.
C-corp — the double-taxation trade
A C-corp pays 21% federal corporate income tax on its profits. When the company distributes those profits to shareholders as dividends, shareholders pay tax again at qualified-dividend rates (0%, 15%, or 20%). That's double taxation — and it's the reason small operating businesses almost never choose C-corp on purpose.
C-corps make sense when (a) you're raising priced venture capital from VCs who require Delaware C-corp on their term sheets, (b) you're reinvesting profits inside the company for growth (no dividend, no second layer of tax), or (c) you're stacking the Qualified Small Business Stock (QSBS / §1202) exemption that can exclude up to $10M of gain on sale of C-corp stock held 5+ years.
Ownership and equity — what investors and employees expect
LLCs use "membership interests," typically expressed as percentages or units in the operating agreement. You can split profits and losses any way the members agree — 50/50 ownership but 70/30 profits is legal. That flexibility is great for partners with different contributions; it's a problem for venture investors who want common stock, preferred stock with liquidation preferences, and option pools with vesting.
Corporations issue stock. That stock can be split into classes (common, preferred Series A/B/C), have vesting schedules attached, be subject to repurchase rights, and be granted as incentive stock options (ISOs) to employees with favorable tax treatment. None of this exists cleanly in LLC-land. If you're hiring with equity or raising priced rounds, the corporate stock model isn't optional — it's the language investors and employees speak.
Compliance — what you actually have to do every year
LLCs are designed for low overhead. In most states you'll file an annual or biennial report ($0–$500 depending on state), keep a current operating agreement, and update your registered agent. That's it. No required board meetings, no minutes, no formal stockholder records.
Corporations carry "corporate formalities" — bylaws, annual board meetings with minutes, annual shareholder meetings, stock ledgers, and resolutions for material actions. Skipping these doesn't just look sloppy; it weakens your liability shield. A plaintiff arguing for "piercing the corporate veil" will point to missing formalities as evidence the corporation wasn't a real separate entity.
Common mistakes founders make
- Forming a C-corp because 'startups use C-corps'
Without VC funding or an exit on the horizon, you've taken on double taxation and Delaware franchise tax for no upside. Form an LLC and convert later if and when you raise.
- Skipping the S-corp election once profits hit $50k+
Defaulting to plain LLC taxation past the breakeven point can cost $5,000–$15,000/year in unnecessary self-employment tax.
- Treating an LLC like a C-corp on paper
Drafting LLC operating agreements that try to mimic preferred stock and option pools usually creates tax surprises and confuses investors. If you need real equity infrastructure, convert to a corporation.
- Commingling funds
Whichever entity you pick, mixing personal and business cash gives plaintiffs the strongest argument to pierce your liability shield. Separate bank accounts from day one.
- Ignoring state-level taxes
California charges every LLC an $800 minimum franchise tax. Delaware charges C-corps $400+ in annual franchise tax. The federal answer isn't the whole picture.
Decision framework
- Will you raise priced VC rounds in the next 24 months? Yes → Delaware C-corp. No → LLC.
- Will you grant equity to employees with vesting? Yes → corporation (or LLC + profits-interest plan with a tax advisor). No → LLC is fine.
- Will net profit exceed $50k/year? Yes → form LLC, plan to S-elect when revenue stabilizes.
- Are you holding real estate, IP, or a portfolio of websites? LLC, usually one per asset class.
- Are you a non-US founder? LLC handles foreign ownership cleanly; S-corp does not (US persons only).