LLC vs. Corporation: What's the Difference?
LLCs and corporations are both business structures formed under state law, and both generally protect owners from personal liability for business debts. The main differences are in taxes and formalities: by default an LLC's profits pass through to its owners, while a C corporation pays its own income tax and its dividends are taxed again to shareholders. Corporations generally have more record-keeping and reporting requirements but can raise money by selling stock.
What the law says
- The SBA's comparison lists both LLCs and corporations (C corps and S corps) as structures in which owners are not personally liable for the business. U.S. Small Business Administration, Choose a business structure
- A corporation is a legal entity separate from its owners that can make a profit, be taxed and be held legally liable. The SBA says corporations offer the strongest protection from personal liability, but cost more to form and require more extensive record-keeping, operational processes and reporting. U.S. Small Business Administration, Choose a business structure
- An LLC's profits and losses can pass through to the owners' personal income without facing corporate taxes, and LLC members are considered self-employed and pay self-employment tax. U.S. Small Business Administration, Choose a business structure
- A C corporation is treated as a separate taxpaying entity. Its profits are taxed at the corporate level when earned and again to shareholders when distributed as dividends, the corporation cannot deduct dividends it pays, and shareholders cannot deduct the corporation's losses. IRS, Forming a Corporation
- For federal income tax, an LLC with two or more members is classified as a partnership by default and a single-member LLC is disregarded as separate from its owner, unless the LLC elects on Form 8832 to be treated as a corporation. IRS, Limited Liability Company (LLC)
- An LLC that elects corporate treatment files Form 1120 as a C corporation, or Form 1120-S if it qualifies for and elects S corporation status. IRS, LLC Filing as a Corporation or Partnership
- An S corporation is a special type of corporation designed to avoid the double taxation of C corporations; profits and some losses pass through to owners' personal income. To get S corp status, a business must file with the IRS, and S corps must still follow the filing and operational requirements of a C corp. U.S. Small Business Administration, Choose a business structure
- A corporation exists separately from its shareholders, so it can usually keep operating if a shareholder leaves or sells shares. By contrast, many states limit how long an LLC can exist, and some require an LLC to dissolve and re-form when membership changes unless an ownership-transfer agreement is in place. U.S. Small Business Administration, Choose a business structure
- The SBA says corporations can raise capital more easily through the sale of stock, which can also be used to attract employees. U.S. Small Business Administration, Choose a business structure
- LLC owners (members) may include individuals, corporations, other LLCs and foreign entities, with no maximum number of members in most states. IRS, Limited Liability Company (LLC)
FAQ
Which protects personal assets better, an LLC or a corporation?
Both generally protect owners from personal liability. The SBA describes corporations as offering the strongest protection, while noting that LLCs protect personal assets in most instances.
What is double taxation?
For a C corporation, profits are taxed to the corporation when earned and then taxed again to shareholders when paid out as dividends.
Can an LLC be taxed like a corporation?
Yes. An LLC can elect corporate treatment on Form 8832, and an LLC that qualifies can elect S corporation status and file Form 1120-S.
Can I switch from an LLC to a corporation later?
The SBA says you can usually convert to a different structure later, but location-based restrictions, tax consequences and unintended dissolution may complicate the change.
Related
- How Is an LLC Taxed?
- How to Get an EIN for an LLC
- What Is an LLC?
- Starting an LLC & Small Business by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.