Jurisdiction: United States

LLC vs Corporation

Last verified: 2026-01-25

Attorney-ReviewedUnited StatesUpdated January 25, 2026

TL;DR

  • • LLC: Simpler, flexible, pass-through taxation by default.
  • • C-Corp: Preferred by VC investors, can issue stock options, double taxation.
  • • S-Corp: Tax election (not a structure), pass-through with restrictions.
  • • Both provide liability protection when properly maintained.
  • • The 'right' choice depends on your specific goals and circumstances.

Quick Comparison

FactorLLCC-Corporation
Default TaxationPass-throughDouble taxation
OwnershipMembership interestsStock/shares
ManagementFlexible (member or manager)Board + Officers required
FormalitiesFewer requiredAnnual meetings, minutes, etc.
VC InvestmentLess commonStandard/preferred
Stock OptionsComplicatedStandard mechanism

When LLC Makes Sense

  • ✓Small business or freelance operation
  • ✓Real estate holdings
  • ✓Business with few owners who want simplicity
  • ✓No plans for outside investment
  • ✓Want to avoid corporate formalities
  • ✓Pass-through taxation is advantageous for your situation

When C-Corporation Makes Sense

  • ✓Seeking venture capital or angel investment
  • ✓Plan to offer employee stock options
  • ✓Anticipate going public (IPO) eventually
  • ✓Want familiar structure for sophisticated investors
  • ✓Significant reinvestment of profits (retained earnings)
  • ✓Planning for eventual acquisition by larger company

Common Misconceptions

"Corporations have better liability protection"

Both structures provide comparable liability protection when properly maintained. The key is respecting the separation between personal and business - not the entity type.

"LLCs can't have investors"

LLCs can absolutely have investors. The structure is just less standardized, which can make negotiations more complex. Some institutional investors prefer corporations for familiarity.

"You should always start with an LLC and convert later"

Conversion has costs and potential tax consequences. If you know you'll seek VC funding, starting as a C-Corp (typically Delaware) may be more efficient.

Frequently Asked Questions

C-Corporations are generally preferred by venture capital investors. The familiar stock structure, ability to issue different share classes, and established legal framework make due diligence and investment structuring easier.
Yes, LLCs can have investors through membership interests. However, the structure is less standardized than corporate stock, which can complicate negotiations and documentation. Some investors specifically require conversion to C-Corp.
Pass-through means the business entity itself doesn't pay federal income tax. Instead, profits and losses 'pass through' to owners' personal tax returns. LLCs and S-Corps are pass-through by default. C-Corps face 'double taxation' - corporate tax plus shareholder tax on dividends.
Yes, conversion is possible in most states. However, conversion can trigger tax consequences and requires proper legal documentation. It's generally easier to start with the right structure than to convert later.
S-Corp is a tax election, not a business structure. Both LLCs and Corporations can elect S-Corp taxation. S-Corp provides pass-through taxation but has restrictions: max 100 shareholders, only US residents/citizens, one class of stock.
Both LLCs and Corporations provide limited liability protection when properly maintained. The key is observing formalities - keeping business and personal finances separate, maintaining proper records, and following state requirements.
Generally yes. LLCs have fewer required formalities - no mandatory board meetings, shareholder meetings, or detailed corporate minutes. However, you should still maintain proper records and an Operating Agreement.

Sources

Related Pages

Forming an LLC in the US→IRS Tax Realities→US Bank Account→

Cite This Entry

Standard

EchoLegal, “LLC vs Corporation,” EchoLegal Legal Encyclopedia, v1.0 (last updated Jan 25, 2026), https://echo-legal.com/en/amerika/llc-mi-corp-mu.

Bluebook

LLC vs Corporation, EchoLegal Legal Encyclopedia (last updated Jan 25, 2026), https://echo-legal.com/en/amerika/llc-mi-corp-mu.

Citation ID:ecl-gde-00006

This content is for general informational purposes only and does not constitute legal or tax advice.