Choosing between an LLC and a C corporation is the first real decision most US founders make. Both give you a separate legal entity and, in most cases, protection for your personal assets. Where they differ is in how they are owned, how they are run, how they are taxed, and how easily they can take on investors. This article compares the two side by side and explains where the S corporation fits, since it is often confused with both.
The short answer
- An LLC is often a good fit for owner-run businesses, consultancies, agencies, online stores and holding companies that want simple administration and flexible taxation.
- A C corporation is often a good fit for startups that plan to raise venture capital, issue stock options to employees, or eventually go public.
Those are tendencies, not rules. Your home country's tax treatment, your investors' preferences and your plans for profits all matter, so treat this guide as a starting point for a conversation with a qualified tax or legal professional.
How each is structured
LLC
An LLC is owned by members. It can be member-managed (the owners run it) or manager-managed (appointed managers run it). The internal rules live in an operating agreement, a contract among the members that can be customized heavily: ownership percentages, profit splits that differ from ownership, voting rights, and what happens when someone leaves.
C corporation
A corporation is owned by shareholders, who hold shares of stock. Shareholders elect a board of directors, and the board appoints officers (such as a CEO and secretary) to run daily operations. Internal rules are set by bylaws, and corporations generally keep more formal records: board consents, shareholder resolutions and a stock ledger.
That extra structure is not just paperwork. Standardized shares, classes of preferred stock and option plans are what make corporations easy for investors to understand and price.
How each is taxed
LLC: flexible by default
The IRS does not have a separate tax category for LLCs. Instead, it applies default rules:
- A single-member LLC is disregarded as separate from its owner, so the activity is reported on the owner's return.
- An LLC with two or more members is treated as a partnership and files a partnership return, with profits passed through to the members.
An LLC can change these defaults. By filing Form 8832, it can elect to be taxed as a corporation. An eligible LLC can also elect S corporation treatment by filing Form 2553.
Pass-through treatment means the business itself generally does not pay federal income tax; the owners do. For US individuals, members are generally treated as self-employed and owe self-employment tax on their share of earnings.
C corporation: taxed at the entity level
A C corporation is a separate taxpayer. It files Form 1120 and pays federal income tax at a flat 21% rate on its taxable income, a rate that has applied to tax years beginning after 2017. When the corporation then pays dividends, shareholders generally pay tax on them again. This is the "double taxation" people mention.
In practice, many growth-stage startups reinvest profits rather than paying dividends, so the second layer of tax may not arise for years. And some founders prefer having profits taxed at the corporate rate while they stay in the business.
Where the S corporation fits
An S corporation is not a separate entity type. It is a federal tax election made by an eligible corporation, or by an LLC that is eligible to elect corporate treatment, by filing Form 2553. An S corporation passes income through to its shareholders, avoiding the corporate-level tax.
The eligibility rules are strict. According to the IRS, an S corporation:
- Must be a domestic corporation
- Can have no more than 100 shareholders
- Can have only one class of stock
- Can only have certain shareholders: individuals, certain trusts and estates, but not partnerships, corporations or nonresident aliens
That last point means the S election is generally not available if any owner is a nonresident alien. Learn more on our S corporation election help page.
Side-by-side comparison
| Feature | LLC | C corporation |
|---|---|---|
| Owners | Members | Shareholders |
| Management | Members or managers | Board of directors and officers |
| Governing document | Operating agreement | Bylaws (plus articles of incorporation) |
| Default federal tax | Disregarded or partnership | Corporate tax at 21%, then tax on dividends |
| Can elect different tax treatment | Yes (corporation, or S corporation if eligible) | S corporation, if eligible |
| Equity for investors | Membership interests, less standardized | Shares, preferred stock, option plans |
| Employee equity | Possible but more complex | Stock options are common |
| Formalities | Generally lighter | Board meetings, minutes, stock records |
| Foreign owners | Allowed | Allowed |
State costs can differ too
Some states charge LLCs and corporations differently, so check both before deciding. Delaware is a good example. As of October 2026:
| Delaware entity | Annual obligation | Due |
|---|---|---|
| LLC | Annual tax of $400, no annual report | June 1 |
| Corporation | Annual report fee of $50 (non-exempt domestic) plus franchise tax, with a minimum of $175 under the authorized shares method or $400 under the assumed par value capital method | March 1 |
Delaware corporations are often surprised by franchise tax bills calculated under the authorized shares method; recalculating under the assumed par value capital method can produce a lower amount for some companies. In Delaware, a late LLC tax payment and a late corporate annual report each carry a $200 penalty, plus interest of 1.5% per month on unpaid tax.
Other states have their own systems. California, for example, charges most LLCs an $800 annual tax. Formation fees for each state are listed on our state fees page.
When an LLC often makes sense
- You are a solo founder or small team running a profitable service or e-commerce business.
- You want profits to pass through to you rather than being taxed at the company level first.
- You prefer lighter ongoing formalities.
- You want flexibility in how profits are split among owners.
- You are not planning to raise money from venture capital funds in the near term.
When a C corporation often makes sense
- You plan to raise from venture capital funds or institutional investors, many of which prefer to invest in corporations.
- You want to grant stock options to employees and advisors.
- You expect to reinvest profits for growth rather than distribute them.
- You want a structure that public markets and acquirers understand without explanation.
- You have, or expect, many owners or several classes of investors.
Notes for non-US founders
The choice can play out differently when owners are outside the US:
- A foreign-owned single-member LLC generally must file Form 5472 with a pro forma Form 1120 every year it has reportable transactions with its owner, even if it has no US income. The IRS penalty for failing to file is $25,000.
- A C corporation that is 25% or more foreign-owned may also need Form 5472 for related-party transactions, and its dividends to foreign shareholders are generally subject to US withholding that a tax treaty may reduce.
- Your home country may classify a US LLC differently from the US, which can change the overall tax result.
- The S election is generally unavailable when any owner is a nonresident alien.
Our guide for forming a US company as a non-US resident covers these points in more detail.
Common misconceptions
- "An LLC cannot take investors." It can. Members can buy into an LLC, and the operating agreement can define different classes of membership. The issue is that many institutional investors prefer, or are structured to require, corporate stock.
- "A corporation always pays more tax." Not necessarily. The comparison depends on how much profit is distributed, the owners' personal tax rates, state taxes and, for non-US owners, their home country's rules.
- "An S corporation is a third entity type." It is a tax election available to eligible corporations and LLCs, not a separate kind of company you form with the state.
- "The state you form in decides your taxes." Federal tax depends on the entity's classification. State taxes depend on where you form and where you actually do business, which may be more than one state.
Can you switch later?
Yes, in most cases, but it has costs. An LLC can elect corporate tax treatment without changing its legal form. Many states also allow an LLC to convert into a corporation by statutory conversion, and founders sometimes do this before a priced funding round. Converting can have tax consequences, requires new documents, and may need new filings in each state where you are registered. It is usually simpler to pick the structure that matches your plan from the start.
Questions to ask before you decide
- Do you plan to raise money from venture capital funds in the next two to three years?
- Will you pay most profits out to owners, or reinvest them?
- Are any owners outside the US, and how does their home country treat each structure?
- Do you want to offer stock options to employees?
- How much ongoing administration are you willing to handle?
- In which state will you actually operate?
Next steps
- Form an LLC with our LLC formation service or a corporation with our C corporation service.
- Check pricing for what you pay: eligible standard formations carry a $0 Firmlane service fee, and you pay the state filing fee shown before checkout.
- Read the international founders guide if you live outside the US.
- Ready to file? Start here, or contact us with questions about our process.
Sources
- IRS: Limited liability company (LLC) (opens in a new tab)
- IRS: S corporations (opens in a new tab)
- IRS: Instructions for Form 1120 (opens in a new tab)
- IRS: Instructions for Form 5472 (opens in a new tab)
- SBA: Choose a business structure (opens in a new tab)
- Delaware Division of Corporations: Annual franchise tax (opens in a new tab)
- Delaware Division of Corporations: LLC/LP/GP tax instructions (opens in a new tab)
Last reviewed: 2026-10-17.