{"id":4816,"date":"2016-04-04T10:47:45","date_gmt":"2016-04-04T15:47:45","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/corporation-versus-llc.html"},"modified":"2025-10-30T22:37:00","modified_gmt":"2025-10-31T03:37:00","slug":"corporation-versus-llc","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/corporation-versus-llc.html","title":{"rendered":"Corporation vs. LLC: What Is Best for Your New Business?"},"content":{"rendered":"\n
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Corporation vs. LLC: What Is Best for Your New Business?<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Both a corporation and a limited liability company<\/span> (LLC<\/span>) offer limited <\/span>liability protection<\/span> for business debts and obligations. Choosing which legal entity<\/span> is right for you comes down to your business goals<\/span> and how you want your corporate profits<\/span> taxed.<\/p>\n\n <\/div>\n\n\n\n

When you\u2019re ready to turn your startup<\/span> dream into a reality, choosing the right business entity<\/span> is like picking the right foundation. Entrepreneurs<\/span> face a big choice: forming a\u00a0limited liability company<\/span><\/a>\u00a0(LLC<\/span>) or a\u00a0corporation<\/a>. This decision affects everything from how you pay your income tax<\/span> to how you protect your personal assets<\/span> from business risks. LLCs<\/span> and corporations offer different perks and have different rules.<\/p>\n

This article is designed to help you figure out whether a corporation or an LLC<\/span><\/a> is right for your business. Although this article cannot give you a firm answer one way or the other, it will attempt to show you the advantages and disadvantages of both corporations and LLCs<\/span>.<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/span><\/b><\/p>\n

Is an LLC<\/span> Right for You?<\/h2>\n

Many small businesses<\/span> may find that the flexibility and simplicity of an LLC<\/span><\/a> make it the better choice when it comes to forming a corporation versus an LLC<\/span>.\u00a0LLCs<\/span> offer liability protection<\/span>, which means if your business stumbles financially,\u00a0your personal assets<\/span> (like your house or car) aren\u2019t at risk. For a single-member LLC<\/span> or small <\/span>business<\/span> owner<\/span>, this is a major advantage.<\/p>\n

If you plan on your business owning property, you will seriously want to consider forming your business as an LLC<\/span><\/a> to avoid the problem of\u00a0double taxes<\/a>. This issue may crop up if the business is formed as a corporation. This double tax problem arises if the business owns property that appreciates in value and the business is formed as a corporation.<\/p>\n

When this happens, both the corporation and the\u00a0shareholders<\/a>\u00a0are taxed by the increase in property value when the property is sold or when the corporation is liquidated. Owners of an LLC<\/span>, however, avoid this double taxation<\/span> problem because the business\u2019 taxes are\u00a0passed through<\/a>\u00a0to the owners of the LLC<\/span>, meaning the LLC<\/span> is not a tax entity<\/span> in itself and does not pay taxes on its business income. LLCs<\/span> are considered a pass-through entity<\/span>,\u00a0which means the Internal Revenue Service (IRS<\/span>) doesn\u2019t require a separate corporation tax from you.<\/p>\n

In an LLC<\/span>, your operating agreement<\/span> will be your blueprint. You don\u2019t need to host annual shareholder meetings<\/span> or wrestle with too much record-keeping<\/span>. An LLC<\/span> can be easier to manage, more flexible, and often friendlier to your wallet when it comes to state fees.<\/p>\n

Is a Corporation Right for You?<\/h2>\n

If you\u2019re aiming to build a business empire, consider the\u00a0corporation<\/a>,\u00a0or C corporation<\/span>. This type of business is a separate <\/span>legal entity<\/span>. It\u2019s like creating another person who can own property, sue, or be sued. Corporations come with a formal management structure. This often includes a board of directors<\/span> and corporate officers. Additionally, you have more stringent requirements such as creating bylaws<\/span> and holding annual shareholder meetings<\/span>.<\/p>\n

Corporations are often able to provide benefits to both employees and investors of the business. For example, if a person is both a shareholder of a business and is also employed as the business\u2019 chief financial officer, the corporation would be able to pay that person a salary and also provide benefits like health insurance.\u00a0<\/p>\n

Because of the setup of a corporation, the business will probably be able to deduct the costs of\u00a0health insurance<\/a>\u00a0from its profits, and the benefit provided to the employee is not considered income. This is a great benefit of forming your business as a corporation.<\/p>\n

Entrepreneurs<\/span> looking for investment might prefer a corporation since you can issue various\u00a0classes of stock<\/span><\/a>\u00a0to attract investors. Corporate income tax<\/span> applies here, and you might face double taxation<\/span>\u00a0on the company profits and again once you receive your distributions. For the right type of business, with big plans and the need for a solid, traditional structure, this might be the way to go.<\/p>\n

Finally, unlike an LLC<\/span>, a corporation has a great incentive system built directly into the structure of the business that can help small businesses<\/span> retain great employees. Corporations can offer their best employees\u00a0stock options<\/a>\u00a0that, in addition to providing an incentive for employees to remain with a business, also provide an incentive for an employee to continue working diligently for the business.\u00a0<\/p>\n

Offering these stock options is an easier way to get employees a membership interest<\/span> in the business, unlike LLCs<\/span>, where it can often be difficult and complex to get employees into the membership circle.<\/p>\n

Is an S Corporation<\/span> Right for You?<\/h2>\n

An\u00a0S corporation<\/span><\/a>\u00a0isn\u2019t a different entity type<\/span> but a tax classification. You can elect this tax status with the IRS<\/span> if you meet certain criteria, like being a U.S. citizen and having a certain type of business and number of shareholders. S corp<\/span> status changes your corporate tax<\/span> liability. Instead of facing corporate income tax<\/span>, your company profits pass through to your personal tax returns<\/span>, similar to an LLC<\/span>.<\/p>\n

There\u2019s a catch, as\u00a0you and the other owners will\u00a0have to pay Medicare<\/span> and Social Security<\/span> taxes on salaries. The S corporation<\/span> is a hybrid, bringing together an LLC<\/span>\u2019s tax benefits and a corporation\u2019s structure.<\/p>\n

If your business is\u00a0formed as an LLC<\/span>, however, you may have to pay self-employment taxes<\/span>. Pass-through taxation<\/span> is an important consideration when weighing LLC<\/span> vs. S corp<\/span>.<\/p>\n

Key Differences Between Corporation and LLC<\/h2>\n
\u00a0<\/div>\n\n\n\n\n\n\n\n\n\n\n
\u00a0<\/td>\nCorporation<\/strong><\/td>\nS Corp<\/span><\/strong><\/td>\nLLC<\/span><\/strong><\/td>\n<\/tr>\n
Legal Structure<\/span><\/strong><\/td>\nSeparate <\/span>legal entity<\/span> from owners (shareholders)<\/td>\nSeparate <\/span>legal entity<\/span>, must elect S status with IRS<\/span>\u00a0<\/td>\nSeparate <\/span>legal entity<\/span> from owners (members)<\/td>\n<\/tr>\n
Formation<\/strong><\/td>\nFile Articles of <\/span>Incorporation<\/span>, adopt bylaws<\/span>, issue stock<\/span><\/td>\nSame as corporation; file Form 2553 with IRS<\/td>\nFile Articles of Organization; draft operating agreement (<\/span>optional in some states)<\/td>\n<\/tr>\n
Ownership<\/strong><\/td>\nUnlimited shareholders; can include entities and foreigners<\/td>\nMax 100 shareholders;\u00a0 no non-resident aliens; only one class of stock<\/span><\/td>\nUnlimited members, including entities and foreigners<\/td>\n<\/tr>\n
Taxation<\/strong><\/td>\nDouble taxation<\/td>\nPass-through taxation<\/td>\nPass-through taxation<\/td>\n<\/tr>\n
Liability Protection<\/strong><\/td>\nYes<\/td>\nYes<\/td>\nYes<\/td>\n<\/tr>\n
Annual Requirements<\/strong><\/td>\nHold annual board\u00a0meetings<\/span>, file annual report<\/span><\/td>\nSame as corporation<\/td>\nMinimal: usually only an annual report<\/span> if required<\/td>\n<\/tr>\n
Corporate Formalities<\/strong><\/td>\nHigh: bylaws<\/span>, minutes, meetings, records required<\/td>\nSame as corporation<\/td>\nLow: flexible management; fewer formalities<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Deciding What Business Structure<\/span> Is Best for You<\/h2>\n

Picking the best entity for your business is important. Your choice should align with your business\u2019s mission and the level of personal liability<\/span> you are comfortable with. If you want less complication with taxes and flexibility, an LLC<\/span> could be your answer. If you\u2019re planning to scale up fast, invite lots of investors, and maybe go public one day, the corporation might be right for you. For those seeking a middle path, an S corp<\/span> status might blend the best of both worlds.<\/p>\n

In this quest to select the perfect business entity<\/span>, don\u2019t do it alone. Enlist a legal guide who can help you navigate business law and choose the path that best suits your business venture and goals.<\/p>\n

Get Legal Help Understanding the Difference Between Corporations and LLCs<\/span><\/h2>\n

As you can see, corporations and LLCs<\/span> each have their own advantages and disadvantages. Whether you\u2019re considering forming a corporation or an LLC<\/span>, it\u2019s best to contact a\u00a0business organization attorney<\/a>\u00a0if you have questions. Then, work with a lawyer or\u00a0reputable business formation<\/span> service<\/a>\u00a0to set up your business.<\/p>\n\n\n

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