Is an LLC Considered a Corporation? Key Differences

Key Takeaways

• An LLC (Limited Liability Company) is not automatically considered a corporation—it’s a separate business entity type with flexible tax options.
• LLCs offer personal liability protection like corporations but differ in ownership structure, management, and compliance requirements.
• An LLC can elect to be taxed as a corporation (C or S Corp) by filing IRS Form 8832 or 2553.
• Corporations have stricter formalities, while LLCs provide operational and profit-distribution flexibility.
• The choice between LLC and corporation impacts taxes, management, fundraising, and compliance.
• LLCs are typically ideal for smaller, owner-managed businesses; corporations suit larger or investor-backed entities.

Is an LLC considered a corporation? A limited liability company, or LLC, is considered a corporation if the LLC owners elect to be treated as a C or S corporation for taxation purposes. Both an LLC and a corporation must register with the state. An LLC is a pass-through structure formed by one or more person, designated as the owner or owners. With pass-through companies, the owners and/or shareholders directly receive the business's profits and losses. Business income is considered their personal income and is taxed on the person's individual taxed return. 

The owners of the LLC must develop an operating agreement and file articles of organization. If you are deciding whether to start an LLC or corporation, an LLC is likely the right choice if any of the following conditions apply:

• You expect to run at a loss for at least the first two years of business and want the owners to be able to absorb these losses.
• You prefer a flexible accounting method.
• Your business owns real estate.
• You prefer a flexible management structure.
• You want to minimize the need for formal annual meetings and documentation thereof.
• You want profit-sharing flexibility.

An LLC structure protects your personal assets from business liability. Unlike with a corporation, LLC owners don't have to be permanent residents or U.S. citizens. The management structure of an LLC is also more flexible. 

However, LLCs cannot attract investors by issuing stock. They may also be subject to different laws in different states.

What Is a Corporation?

A corporation is a business structure where profits and losses are taxed to the corporation rather than to the owners as with an LLC. To form a corporation, you must assign shareholders and file organization forms with the state where you do business. You must create a Board of Directors to oversee corporate operations. Incorporating helps protect your personal assets from lawsuits and/or debts accrued by the corporation.

Filing corporations">Articles of Incorporation automatically designates your business as a C, or regular, corporation. This type of business is considered a separate entity for tax purposes. However, C corporation owners are subject to double taxation since dividends are taxable to the business and subject to personal income tax. For this reason, most small businesses decide against establishing a C corporation.

A C corporation might be the right structure for your business if any of the following conditions apply:

• You plan to seek venture capital.
• Flexible profit-sharing is desired.
• You plan to grow your business using the profit it creates.
• You want the tax advantages of distributing profits to owners and shareholders.
• You want to be able to set salaries for owners and employees.
• You plan to provide health insurance and other employee benefits.
• You plan to sell the business in the future.
• You want an accountable entertainment and travel plan.
• You plan to offer employee stock options.
• Your business owns or plans to buy real estate.
• You want to lower your risk of an IRS audit.

Types of Corporations: C Corporation vs. S Corporation

Corporations are often categorized into C corporations (C corps) and S corporations (S corps), each with unique tax and ownership rules.

• C Corporation:
  A C corporation is the standard form of incorporation. It pays corporate income tax on its profits and may face double taxation—first on the company’s income and again on shareholder dividends. However, C corps can issue multiple classes of stock, making them attractive to venture capitalists and institutional investors.
• S Corporation:
  An S corporation allows profits and losses to pass through to shareholders’ personal tax returns, avoiding double taxation. To qualify, the business must have no more than 100 shareholders, all of whom must be U.S. citizens or residents. S corps also have restrictions on stock classes and ownership entities.

Choosing between these corporate types depends on your company’s goals—C corps favor scalability and investment, while S corps suit smaller, closely held entities.

Key Differences Between LLCs and Corporations

While both LLCs and corporations are state-recognized business entities that limit owners’ personal liability, they differ in formation requirements, tax treatment, and operational structure:

• Formation and Formalities: Corporations require articles of incorporation, a board of directors, annual shareholder meetings, and detailed corporate recordkeeping. LLCs require articles of organization and an operating agreement, with fewer ongoing formalities.
• Taxation: LLCs are taxed as pass-through entities by default, avoiding corporate-level tax, but can elect to be taxed as a corporation. C corporations face double taxation, while S corporations avoid it but have eligibility restrictions.
• Management Structure: Corporations use a hierarchical structure with shareholders, directors, and officers. LLCs can be member-managed or manager-managed, offering more operational flexibility.
• Ownership and Investment: Corporations can issue various classes of stock and attract outside investors more easily. LLCs cannot issue stock, which may limit certain funding options.
• Lifespan: Corporations have perpetual existence, whereas some states require LLCs to have a defined dissolution date unless otherwise stated.

Liability Protection and Legal Formalities

Both LLCs and corporations shield owners from personal liability for business debts and lawsuits. However, corporations follow stricter legal formalities, including mandatory board meetings, bylaws, and detailed record-keeping.

LLCs, on the other hand, operate with fewer administrative requirements. Most states only require an Operating Agreement and Articles of Organization, allowing owners (called members) to decide internal management rules. This makes LLCs particularly appealing for startups, freelancers, and small business owners seeking simplicity without compromising asset protection.

YouTube as an LLC

YouTube registered as a corporation in the state of Delaware in October 2005. Just over a year later, the corporation was converted into an LLC. The ability to change to a different entity at any time is a unique benefit of companies based in Delaware. Only a few members own YouTube LLC. Because Delaware LLCs do not require public disclosure about members, financial valuation, and ownership percentages, these members are the only people who know the specifics of YouTube's financials. LLCs in Delaware are not subject to state or federal public registration or disclosure. The owners of YouTube chose this model after meeting Google investors and realizing that they could receive funding without public status.

Google as a Corporation

Google became a corporation in 1998 and went public on the NASDAQ in 2004. They took this step so that they could raise money from investors. Although a large portion of Google is owned by organizations and corporations, millions of individuals also own shares of the company.

LLC or Corporation: Which Should I Select for My Business?

New business owners often receive conflicting information from well-meaning friends and acquaintances, which can make it confusing to determine if you should register as an LLC or corporation. Except for sole proprietorships, all businesses must register as a specific type of business in the state where they are located. Depending on the state, choices typically include corporations, partnerships, LLCs (limited liability companies), or variations of those structures. New businesses must consider a range of factors when deciding what type of business entity to register.

Choosing Based on Growth, Investors, and Compliance

Your decision depends largely on long-term goals and financing needs.

• Choose an LLC if you want flexibility in management, minimal compliance requirements, or a business structure that can easily convert to a corporation later. LLCs are also ideal for real estate holdings, family businesses, or service-based firms.
• Choose a Corporation if you plan to seek investors, issue stock, or eventually go public. Corporate structures provide continuity and credibility, particularly for businesses scaling rapidly.

It’s also important to consider compliance costs—corporations typically incur higher annual fees and reporting requirements, while LLCs are less burdensome in most states.

Tax Classification Options for LLCs

The IRS does not classify an LLC as a corporation by default. Instead, an LLC is treated as a disregarded entity (if single-member) or a partnership (if multi-member) for tax purposes. However, LLC owners can file Form 8832 or Form 2553 to elect C corporation or S corporation status.

• Single-Member LLCs: Report business income on the owner’s personal tax return (Schedule C), unless electing corporate taxation.
• Multi-Member LLCs: File partnership tax returns (Form 1065) by default but can opt for corporate tax treatment.
• S Corporation Election: Can provide potential self-employment tax savings for qualifying LLCs, but comes with payroll requirements and eligibility restrictions.
• C Corporation Election: May benefit LLCs reinvesting profits into the business but subjects them to double taxation.

Choosing the right tax classification depends on projected profits, reinvestment plans, and owner compensation strategies.

How an LLC Can Elect Corporate Taxation

By default, LLCs are pass-through entities, meaning the business itself doesn’t pay federal income tax. Instead, profits and losses flow to members’ personal returns. However, the IRS allows LLCs to elect corporate taxation under either:

• C Corporation status by filing Form 8832, which subjects profits to corporate income tax but may offer benefits for reinvested earnings or fringe benefits.
• S Corporation status by filing Form 2553, which allows owners to pay themselves a reasonable salary and receive dividends that may reduce self-employment taxes.

These elections can provide strategic tax planning advantages depending on income level, business type, and owner compensation preferences.

Pros and Cons of LLCs vs. Corporations

LLC Advantages:

• Flexible management and profit distribution
• Pass-through taxation (avoiding double tax by default)
• Fewer compliance requirements
• Ability to choose corporate tax treatment if beneficial

LLC Disadvantages:

• Cannot issue stock
• May face self-employment taxes on all profits
• Varying rules by state may affect flexibility

Corporation Advantages:

• Easier to raise capital through stock issuance
• Perpetual existence regardless of owner changes
• Potential tax deductions for benefits and salaries
• Clear ownership transfer through share sales

Corporation Disadvantages:

• More formalities and compliance obligations
• Potential for double taxation (C corporations)
• Less flexibility in profit distribution

State-Specific Considerations When Forming an Entity

The rules governing LLCs and corporations differ by state, influencing costs and compliance. For example:

• Delaware is known for its business-friendly laws and strong liability protections, favored by large corporations and startups.
• Nevada and Wyoming offer privacy benefits, low fees, and minimal reporting obligations for LLCs.
• California and New York impose higher franchise or filing fees but provide strong consumer and employee protections.

When deciding where to form your business, compare annual report requirements, filing fees, and state tax rates. Consulting a business attorney through UpCounsel can help ensure compliance with your chosen jurisdiction’s laws and optimize your structure for liability and tax benefits.

Frequently Asked Questions

1. Is an LLC considered a corporation for tax purposes?
   Only if it elects to be taxed as one. By default, an LLC is a pass-through entity, but owners can file IRS Form 8832 or 2553 to choose corporate taxation.
2. What’s the main difference between an LLC and a corporation?
   An LLC offers flexibility and simpler management, while corporations have stricter formalities but can issue stock and raise investment capital.
3. Can an LLC later become a corporation?
   Yes. Many LLCs convert to corporations as they expand or attract investors. The process involves filing conversion documents with the state.
4. Do LLCs and corporations both protect personal assets?
   Yes, both structures provide limited liability protection, separating personal and business assets.
5. Which structure is best for startups?
   Startups often begin as LLCs for flexibility and cost-efficiency, then convert to corporations when seeking outside funding or public listing opportunities.

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