LLC vs Corporations: Which Is Better for Your Small Business?
This is the #1 question we’re asked. The answer is, it depends. Keep in mind you’ll choose between the two for your business entity, and then select your tax election amongst S Corps and C Corps. By the time you’re done here, you’ll have a complete understanding of corporation types and which is best for you.
LLC vs. Corporations
Business Structure
A limited liability company (LLC) and a corporation are known as business structures. By filing as a business, you create a legal entity that’s separate from you as a person.
LLC Tax Status
In addition to your business structure, you determine your tax status. If you’re an LLC, how you’re taxed is determined in part by your ownership: If your LLC has one owner (single-member LLC), the IRS views it as a disregarded entity. This means the LLC itself does not pay taxes. The owner reports the business income and expenses on their personal tax return. When an LLC has multiple owners, it’s taxed as a partnership. A partnership is also a pass-through entity. It files a tax return, but the income still flows through to the owners. LLCs can also elect to be taxed as an S Corp or C Corp. This is not the same as registering your business as a corporation.
Corporation Tax Status
When you register as a corporation with LLC Attorney, you choose an S Corporation or a C Corporation. Each type is taxed differently. Your long-term goals determine which one is right for your business.
LLCs Taxed as S Corps
Many small businesses start as LLCs. As revenue and profits grow, change your tax status to that of an S Corp. This is ideal because you get the asset protection and tax efficiency of an S Corp without the compliance requirements.
Bottom Line
Most small businesses find it best to start as an LLC. Unless you’re looking to raise capital from outside investors or take your company public, the compliance requirements of a corporation aren’t worth the hassle.
Converting from an LLC to a Corporation
Yes, you can start as an LLC and convert to a corporation. This lets you take advantage of the benefits a corporation offers. Each corporation structure was designed to help your business achieve specific goals. We can help!
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Start My BusinessLLC vs. S Corps vs. C Corps: Choosing the Right Small Business Structure
Still not sure which is right for your business? Take a look at this chart to see the differences side by side. Remember, we’re here to help.
| LLC | S Corporation | C Corporation |
|---|---|---|
| Protects your personal assets from your business liability | Protects your personal assets from your business liability | Protects your personal assets from your business liability |
| Does not require a board of directors An LLC taxed as an S Corp does not require a board of directors. | Requires a board of directors | Requires a board of directors |
| Unlimited owners allowed | Can allocate shares to up to 100 or fewer owners/shareholders. | Can issue shares to founders, employees, and investors |
| Cannot go public | Can only have up to 100 owners, so cannot go public | Unlimited shareholders allow a C Corp to go public |
| Requires meetings and records, but less formal and less frequent. | Requires meetings and record-keeping | Requires meetings and record-keeping |
| Owners can be anyone, including non-US citizens, other LLCs, or corporations | Owners must be individuals (with few exceptions) and US citizens | Owners can be non-residents, making a C Corp ideal for international business endeavors |
| The number of owners determines how the IRS views an LLC for federal tax purposes | The IRS considers an S Corp a pass-through entity, meaning it passes tax liability to its shareholders. Shareholder(s) then report gains and losses on their personal tax returns, assessed at their individual income tax rates. | A C Corp pays corporate-level taxes. C-corp owners are required to pay a corporate tax to the federal government and sometimes to their state. There are tax deductions that can make a C Corp more tax advantageous. It's also subject to double taxation: The corporation pays taxes on its earnings, and owners pay taxes on distributed earnings. |
| Tend to be smaller companies and single owners | Tend to be smaller companies and single owners | Tend to be larger companies because the structure allows for limitless growth |
| Not ideal to raise capital from outside investors | Because of shareholder limitations, it’s difficult to raise capital from outside investors | Ideal for raising capital from outside investors |
Should You Form an LLC or a Corporation?
Select an answer to learn more.
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LLC vs Corporations FAQs
This is such an important question. The answer really lies in your company’s goals. When you’re first starting out, most of the time starting as an LLC is going to be the most beneficial. It’s easier to form and maintain. This isn’t true for every business, however. For instance, if your business wants to attract investors, starting as a corporation may be the better option.
Yes, it can. The process differs depending on your state. You also need to get a new Employer Identification Number (EIN) from the IRS. Given the tax flexibility of LLCs, you can choose to be taxed as a corporation without actually converting to one.
Each business structure offers benefits to companies that are in a position to leverage them. Incorporating your LLC lets you take advantage of what the corporation structure offers. Corporations have significant tax advantages. Incorporating may give you increased credibility, depending on your industry. If you want to take your business public, you need to be structured as a corporation. It makes attracting investors and raising capital easier. Venture capitalists also usually prefer to invest in corporations because of their formal structure and liquidity potential through initial public offering or acquisition. A corporation requires more time and effort to stay compliant. It may be worth it, however, if your business goals are aligned with their advantages. We’re here to help guide you!
Most investors prefer C Corporations over both S Corporations and LLCs. The C Corporation structure is the most advantageous in attracting investors because of the way its shares work. Shares are unlimited and freely transferable. If you want to take a company public, it needs to be a C Corporation. It’s simply the fastest way for an investor to recoup their investment.
If you’re considering converting your LLC to an S Corp, your revenue is probably significant. While there isn’t a legal requirement of revenue, there is a practical one. A professional is the best to consult about your specific business; however, in general, once your business revenue is at least $50,000, you may want to consider converting to help mitigate your tax responsibility.
