Choosing the right legal structure is one of the first and most important decisions you’ll make when starting a business. It shapes how you’re taxed, how you’re protected legally, and how your business can grow. In this guide, we’ll break down the key differences between LLCs and Corporations so you can decide which is most aligned with your business goals.
What is an LLC
An LLC is a business entity that gives owners liability protection while letting profits and losses flow through to their personal tax returns.
- Owners (called members) aren’t usually personally liable for business debts or legal issues.
- By default, the IRS treats a single-member LLC like a sole proprietorship and a multi-member LLC like a partnership, unless you elect otherwise.
- There’s flexibility in how it’s managed, how profits are distributed, and how it’s taxed.
Ideal for: small businesses, solo founders, service providers, and those who want liability protection without corporate formalities.
You can learn more about LLCs on the IRS website here.
What is a Corporation
A Corporation is a separate legal entity owned by shareholders. It has more formal requirements and is often chosen by businesses looking to grow quickly or raise outside capital.
- Corporations must follow more rules, including bylaws, board meetings, and keeping detailed records.
- C Corporations pay corporate taxes and shareholders pay taxes on dividends (double taxation).
- S Corporations avoid double taxation, but there are restrictions on ownership and stock classes.
- Corporations can raise capital by issuing stock and are generally preferred by investors.
Ideal for: startups planning to scale, attract investors, or eventually go public.
You can learn more about Corporations on the IRS website here.
Key Differences Between an LLC and a Corporation
- Ownership and Management: LLCs are owned by members with flexible management. Corporations are owned by shareholders and run by a board of directors and officers.
- Taxation: LLCs typically offer pass-through taxation. Corporations may face double taxation unless they qualify as S Corps.
- Paperwork and Compliance: LLCs have fewer formal requirements. Corporations must maintain corporate records and hold regular meetings.
- Raising Capital: LLCs may face challenges raising money. Corporations can issue stock and are usually more appealing to investors.
- Liability Protection: Both structures offer strong protection of personal assets when properly maintained. Learn more about common compliance mistakes small business owners make.
Pros and Cons of LLCs
Pros:
- Personal liability protection for owners
- Simpler to form and maintain
- Flexible tax treatment
- Fewer compliance requirements
Cons:
- May not be ideal for attracting investors
- Less formal structure can lead to confusion in multi-member businesses
- Self-employment taxes can be higher without planning
Pros and Cons of Corporations
Pros:
- Well-suited for raising capital
- Structured governance and succession planning
- Perceived as more credible or established
- Clear division between owners and management
Cons:
- Double taxation if structured as a C Corp
- More compliance requirements and administrative work
- Stricter rules for S Corporation eligibility
Which One is Right for You?
Your decision should reflect your goals, structure, and growth plans:
- LLC: best for small or family-run businesses, freelancers, and startups that want simplicity and flexibility.
- Corporation: best for growth-focused startups, businesses planning to raise capital, or those needing a formal structure.
It’s also possible to convert from one structure to another later, as your business evolves.
Can You Convert an LLC to a Corporation?
Yes, you can convert an LLC to a Corporation or vice versa in most states. It involves paperwork, potential tax implications, and legal considerations, so it’s a good idea to consult with your attorney or accountant (or both) before making the change.
Making the Right Choice
Choosing the right business structure has long-term implications. Take the time to understand your options and how they align with your current and future goals. If you’re still unsure, it’s best to consult with your attorney or accountant to determine what business structure would best serve your business.
Ready to Get Started?
If you want help setting up your business the right way, URA is here for you. We offer fast, reliable formation services in all 50 states and help you stay compliant as you grow. Get started with URA today.
