Key Takeaways

  • An LLC corporation comparison centers on ownership, taxation, and management flexibility.
  • LLCs offer pass-through taxation, fewer formalities, and flexible management structures.
  • Corporations (C or S corp) provide strong investor appeal, easier stock issuance, and established corporate governance.
  • You can elect to have your LLC taxed as a corporation to lower self-employment taxes or attract outside investors.
  • The best choice depends on your goals—LLCs suit small, flexible operations, while corporations fit growth-oriented ventures.

An LLC as corporation is primarily an advantageous step for tax reasons. An LLC is defined as one or more members who form an organization under articles of organization and an operating agreement. An LLC is most notable for its pass-through taxation method, where losses and profits pass through the LLC to individual members. Compensation is determined by each member’s share in the LLC.

On the other hand, a corporation is a distinct business entity that’s formed by articles of incorporation. A corporation is governed by a board of directors who oversee everyday aspects of the business. Each shareholder is designated a certain amount of shares based on the amount invested in the company.

Entity Types

All business organizations must register as some form of business entity in the state where business operations take place. States recognize the following business entities:

Choosing which entity suits your business best will depend on your goals and what type of tax advantages you desire, which is why you should seek the advice of an attorney or accountant if you are unsure which entity is best you. It’s worth noting that not all attorneys and accountants are fully aware of all current LLC laws, which is why you should always conduct your own research as well.

Understanding LLC and Corporation Ownership Structures

An LLC and a corporation differ significantly in how ownership is structured.

  • LLC Ownership (Members): An LLC is owned by one or more individuals or entities called members. Ownership percentages are defined in the operating agreement, which can also outline profit distribution and management roles.
  • Corporate Ownership (Shareholders): A corporation is owned by shareholders who invest in the company in exchange for shares of stock. These shareholders elect a board of directors to oversee major decisions.

This difference affects how each entity raises money. LLCs often rely on personal contributions or loans, while corporations can issue stock to attract investors, a major advantage for businesses planning large-scale growth.

LLC vs. Corporation

An LLC has a more central management set-up than corporations do. In addition, any member can be the organization’s manager, or the business can choose to give no distinction between the manager and owner.

Corporations operate under a board of directors that delegate responsibilities to other parties (officers), who handle all of the daily business operations. Unlike LLC members, board members separate themselves from everyday decisions of the business, with the exception of major business decisions, and only have the power to appoint directors. With that, shareholders can also be elected as directors or officers.

When it comes an LLC and corporation, the IRS places them in two categories for tax purposes:

Many new business owners mix up these concepts, but it is simply the manner in which the IRS classifies all business entities.

Key Legal and Structural Differences Between an LLC and Corporation

When comparing an LLC vs corporation, the main differences extend beyond taxation:

  1. Formation and Documentation:
    • LLCs are formed through Articles of Organization and an Operating Agreement.
    • Corporations require Articles of Incorporation, bylaws, and regular board meetings.
  2. Management:
    • LLCs allow owners to manage directly or appoint managers.
    • Corporations must maintain a hierarchy—shareholders, directors, and officers—with formal voting and recordkeeping.
  3. Liability:
    Both structures offer limited liability protection, shielding personal assets from business debts and lawsuits.
  4. Lifespan:
    Corporations have perpetual existence, meaning ownership changes do not dissolve the entity. Some states require LLCs to renew registration periodically.
  5. Tax Options:
    LLCs default to pass-through taxation but can elect corporate taxation (C or S corp). Corporations are taxed as C corps by default but can elect S corp status if they qualify.

Which Is Best for You?

Depending on your needs, you can choose a tax form that yields the lowest form of taxation. Personal tax rates on partnerships and sole proprietorships are generally higher than the highest rates on corporations.

In essence, your taxable income in the form of adjusted gross income, including net income, tends to be high. For this reason, it would be prudent to remove your LLC from the personal taxation category and into a corporate structure.

The primary advantage of an LLC being taxed as a corporate entity is the owner not having to report all business income on a personal tax return, which would subject the owner to higher taxes.

You may combine an LLC and an S corp, but you must file a request to do so.

However, the IRS has certain restrictions on an S Corp when compared to an LLC:

  • LLCs are allowed to have as many members as desired, while S corps are restricted to no more than 100 shareholders.
  • Non-U.S. citizens and residents can become members of an LLC, but S corps restrict such members.
  • Other entities such as S corps, C corps, LLCs, and partnerships cannot own S corps, but LLCs can be owned by other business entities.
  • LLCs are allowed subsidiaries with no restrictions.

When to Choose an LLC Taxed as a Corporation

Electing to have your LLC taxed as a corporation can provide strategic advantages in certain situations:

  • Reducing Self-Employment Taxes: LLC members pay self-employment taxes on all earnings, but a corporate tax election allows owners to pay themselves a reasonable salary while leaving profits in the business, lowering overall tax burden.
  • Attracting Investors: Corporations are often favored by venture capitalists, but an LLC taxed as a corporation can offer similar advantages while maintaining flexible management.
  • Reinvesting Profits: If your business plans to reinvest earnings rather than distribute them, the corporate tax rate may be more beneficial.
    However, this structure also adds complexity—owners must file corporate returns and comply with more regulations.

S corp vs. C corp

An S corp is classified as a standard corporation that can be taxed via the pass-through tax method. All yearly income passes from the corporation to individual shareholders to file on business income tax returns. This also prevents S corps from a double tax, which would be a tax on the business and another tax on the owners. In essence, S corps are taxed as partnerships. One of the few drawbacks of an S corp is that only smaller ones typically qualify, and they are restricted to only one stock class.

C corps are the standard structure of a corporate entity when owners file articles of incorporation. Like LLCs, C corps distinguish personal and business assets, safeguarding them from lawsuits. You may also combine a C corp and LLC, but doing so would not make sense in most cases due to the issue of double taxation. However, it can be advantageous in certain respects. For example, an LLC owner can choose C corp classification to attract investors and raise equity.

Advantages and Disadvantages of Each Entity

LLC Advantages:

  • Simple formation and minimal ongoing paperwork.
  • Pass-through taxation avoids double taxation.
  • Flexible ownership and profit-sharing arrangements.
  • Protection of personal assets from business liabilities.

LLC Disadvantages:

  • Self-employment taxes can be higher.
  • Limited ability to issue stock or attract outside investors.

C Corporation Advantages:

  • Easier to raise capital by issuing multiple classes of stock.
  • Can retain earnings within the company at a lower tax rate.
  • Offers perpetual existence and established corporate credibility.

C Corporation Disadvantages:

  • Double taxation—profits are taxed at both the corporate and shareholder level.
  • Requires detailed recordkeeping, bylaws, and annual meetings.

S Corporation Advantages:

  • Pass-through taxation like an LLC, avoiding double taxation.
  • Owners can be paid salaries and take dividends to reduce taxes.

S Corporation Disadvantages:

  • Limited to 100 shareholders, all of whom must be U.S. citizens or residents.
  • Only one class of stock is permitted.

These differences highlight that an LLC corporation comparison is not one-size-fits-all. Your ideal choice depends on factors like business size, growth plans, and funding needs.

Frequently Asked Questions

1. What is the main difference between an LLC and a corporation? An LLC offers management flexibility and pass-through taxation, while a corporation operates with a formal structure of shareholders, directors, and officers and can issue stock.

2. Can an LLC become a corporation? Yes. You can file IRS Form 8832 to have your LLC taxed as a corporation or reorganize the business legally through state conversion laws.

3. Why would an LLC choose corporate taxation? Many LLCs elect corporate taxation to lower self-employment taxes, retain earnings, or appeal to potential investors.

4. Is an LLC or corporation better for small businesses? An LLC is usually best for small or closely held businesses due to simplicity, while corporations suit businesses seeking investment or rapid growth.

5. Does a corporation offer better liability protection than an LLC? Both entities provide limited liability protection, shielding owners from personal responsibility for business debts and obligations.

To learn more about an LLC as corporation, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers will help you establish the best tax structure for your LLC based on your goals and preferences. Our lawyers will also help you navigate the IRS tax system so you can save on taxes and use the extra money to expand your business.