LLC vs. Corporation: Which Is Right for Your Business? - NerdWallet (2024)

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When trying to choose a structure for your small business, a limited liability company (LLC) and a corporation are two common options. An LLC is a legal structure that provides personal liability protections and combines the benefits of a corporation and a partnership. Although a corporation also offers liability protections, it differs from an LLC in terms of ownership structure, management and taxes.

Did you know...

The word corporation can refer to multiple business structures, including C-corporations, S-corporations and nonprofit corporations. Because C-corps are the default legal entity, however, the general use of “corporation” typically refers to this type of structure.

Understanding these differences will help you decide which business entity type is right for your needs. Here’s what you need to know about LLCs vs. corporations.

LLC vs. corporation, summarized

LLC

Corporation

Ownership

Membership interests.

Owned by one or many members; no maximum number of members.

Shares.

Owned by shareholders; no maximum number of shareholders.

Management

Managed by members or designated managers. Minimal recordkeeping and annual requirements.

Managed by directors and officers. Stricter initial and ongoing requirements; requires bylaws and issuing stock, as well as annual shareholder meetings and reporting.

Liability

Limited liability for members and managers.

Limited liability for shareholders, officers and directors.

Taxes

Owners can choose their desired tax treatment. Can avoid corporate taxes (i.e. double taxation) when treated as a pass-through entity.

Double taxation. Corporation is taxed as a business entity; shareholders receive profits and are taxed at the individual level.

Differences between an LLC and a corporation

LLCs and corporations are both business entities that are created by filing formation documents with the state. Both structures provide their owners with limited liability protection. In other words, these companies exist as their own legal entities, thereby protecting the owners from being held personally liable in the event of bankruptcy or lawsuits.

Here’s how LLCs and corporations differ:

Ownership

LLCs are owned by members. Each member owns a percentage, also called a membership interest, in the business. You can have a single-member LLC — an LLC with one owner — as well as a multi-member LLC. There is no limit to the number of members you can have, and members may include individuals, corporations, other LLCs and foreign entities (although this may vary by state).

Corporations, on the other hand, are owned by shareholders. Shareholders invest money or assets in the business in exchange for shares of stock that correspond to ownership. There is no limit to the number of shareholders a corporation can have.

Formation

To form an LLC, you must file a legal document called the articles of organization with your Secretary of State. The articles of organization contain basic details about your LLC, including its name, address and information about the members.

Although only required in a handful of states, it’s generally advised that you also create an LLC operating agreement. This document outlines how the LLC will be run, how membership interest is distributed and how it can be transferred between members.

The operating agreement should also specify what happens when a member leaves the LLC. In some states, if this information is not included, the LLC must be dissolved when a member leaves.

To form a corporation, you’ll file articles of incorporation with your Secretary of State. Similar to articles of organization, articles of incorporation contain basic information about your business. After you file with the state, you’ll need to complete a series of tasks that aren’t required for LLCs.

As a corporation, you’ll need to create and adopt corporate bylaws, elect a board of directors and issue stock to shareholders. Unlike LLCs, however, it’s relatively easy to transfer corporate shares — and corporations can survive even if a shareholder leaves the business. For this reason, professional investors prefer to work with corporations.

» MORE: How to incorporate a business

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Management and ongoing requirements

Corporations have fairly strict management and ongoing requirements, whereas LLCs have more flexibility.

A corporation’s elected board of directors manages the company as a whole, and appoints officers to run day-to-day operations. Corporations must hold annual shareholder meetings, record stock issues and transfers, file annual reports and maintain corporate records, among other ongoing requirements.

LLCs, on the other hand, can be managed by their members (called a member-managed LLC) — or members can elect managers to run the business. Although most states require LLCs to file annual reports, this is not required in every state — and LLCs don’t typically have many other formal requirements.

Taxes

Perhaps the biggest difference between LLCs and corporations is how they’re taxed. By default, corporations are taxed as C-corporations. The business pays corporate taxes and the shareholders pay personal income taxes on profits they receive from the company. This is often referred to as double taxation.

To avoid double taxation, some corporations elect to be taxed as an S-corporation. With an S-corp, profits pass through to the shareholders’ personal tax returns and they pay taxes on those profits. Not all corporations qualify to be an S-corp, however. S-corps can only have one class of stock and no more than 100 shareholders.

LLCs have more flexibility in choosing how they’d like to be taxed. LLCs do not have their own IRS tax classification. Instead, single-member LLCs are taxed as sole proprietorships and multi-member LLCs are taxed as partnerships by default.

When taxed as a sole proprietorship or partnership, an LLC benefits from pass-through taxation (and avoids double taxation). This means that the profits of the business pass through to the members, and the members pay income and self-employment taxes on their share. An LLC can, however, elect to be taxed as a C-corp or an S-corp.

How to choose between an LLC and a corporation

When selecting an organizational structure for your business, there are many factors to consider.

You might choose an LLC if you want to avoid corporate taxation, don’t plan to fundraise with investors and prefer minimal formal regulations. You might choose a corporation, on the other hand, if you’re looking to sell ownership, attract investors or go public in the future.

It’s often helpful to consult with a certified public accountant or business attorney to get professional advice on what’s best for your needs.

A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.

LLC vs. Corporation: Which Is Right for Your Business? - NerdWallet (2024)

FAQs

LLC vs. Corporation: Which Is Right for Your Business? - NerdWallet? ›

Corporations are better suited than LLCs for raising money from outside investors. LLC members can't take a salary, and all draws from the business are subject to income taxes.

Which one is better, LLC or corporation? ›

Forming an LLC or a corporation will allow you to take advantage of limited personal liability for business obligations. LLCs are favored by small, owner-managed businesses that want flexibility without a lot of corporate formality. Corporations are a good choice for a business that plans to seek outside investment.

Is it better to go from an LLC to a corporation? ›

If your company is exhibiting significant growth, converting from an LLC to a corporation will give you the flexibility to allocate some profits to qualify for a lower income-tax bracket," says Paul Sundin, a CPA and tax strategist for Emparion.

What legal structure is best for my business? ›

LLCs offer both protection and flexibility, and the LLC is a popular choice for a legal structure of a business. They protect you from personal liability and provide tax flexibility similar to sole proprietorships and partnerships.

Do corporations pay more taxes than LLC? ›

As a separate legal entity, corporations are responsible for paying taxes on the corporate level. The federal corporate income tax rate was 21% in 2022. LLCs do not pay this tax; rather, the company profits get passed to the owner and they pay personal income tax.

Why is C Corp better than LLC? ›

LLC: Advantages. In the C-corp structure, company profits can remain in the company rather than being paid out to shareholders. A C-corp can also easily issue shares of stock to raise money to expand the business.

Why convert LLC to C corp? ›

LLC owners may be loath to give up some of the tax benefits associated with their business entity's status, but converting to a C-corp can open up a ton of doors for a growing startup. In cases where VC and/or other private equity investment is necessary for growth, converting may become inevitable.

Why choose S-corp over LLC? ›

S corporations may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount.

What are the disadvantages of a corporation? ›

Here are some disadvantages to forming your business as a corporation:
  • A corporation is a distinct legal entity. The business is governed by a board of directors. ...
  • Double-taxation. Corporations pay taxes on profits distributed to shareholders. ...
  • More complicated to form. ...
  • More requirements. ...
  • Higher costs.

Why do people prefer LLC? ›

You may prefer an LLC if you: want a high degree of management flexibility in running your company. want to allocate profits and losses based upon criteria other than ownership percentage. prefer to avoid the state-mandated requirements imposed on corporations, such as annual meetings.

What are the risks of an LLC? ›

LLC disadvantages
  • Limited liability has limits. A judge can rule that an LLC structure doesn't protect your personal assets. ...
  • Self-employment tax. If an LLC is taxed as a partnership, the government considers members who work for the business to be self-employed. ...
  • Consequences of member turnover.
Mar 11, 2024

What can LLCs not do? ›

There are also limits to an LLC's liability protection. You will still be personally liable if someone sues you for your own negligence or wrongdoing—even if the accusations are related to your business. An LLC does not protect your assets if you personally guarantee a contract or loan.

What is the safest business structure? ›

Limited liability company (LLC)

A limited liability company is often the best choice for a business. The LLC offers simplicity, flexibility and limited personal liability from business creditors. Number of owners. An LLC may have one or more owners.

What is better for a small business, LLC or corporation? ›

You might choose an LLC if you want to avoid corporate taxation, don't plan to fundraise with investors and prefer minimal formal regulations. You might choose a corporation, on the other hand, if you're looking to sell ownership, attract investors or go public in the future.

What is the best form of business ownership? ›

A corporation, sometimes called a C corp, is a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures.

Who is an LLC best for? ›

Who Should Form an LLC? Any person starting a business, or currently running a business as a sole proprietor, should consider forming an LLC. This is especially true if you're concerned with limiting your personal legal liability as much as possible. LLCs can be used to own and run almost any type of business.

Why LLC is the best option? ›

Because an LLC is a separate entity, the owners of the company have limited liability. This is one of the most important benefits to operating as a limited liability company. Limited liability means that the individual assets of LLC members cannot be used to satisfy the LLC's debts and obligations.

Is an LLC good or bad? ›

The Bottom Line. LLCs are a good combination of protection with flexibility and tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability.

What happens if you start an LLC and do nothing? ›

Simply put, yes, you can have an LLC with no income, but that still has expenses. An LLC with no income but deductible expenses can offset future income through a net operating loss deduction. However, the IRS will still regard this as business activity, so it must be reported yearly.

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