LLC vs. Corporation: What’s the Difference?

When you start your own business, one of the first decisions you’ll make is what type of business structure you want to use.

LLCs are owned by a single member or multiple members. Corporations are legally separate business entities that are owned by shareholders. Each business structure has unique advantages and potential disadvantages to consider.

LLCs vs. corporations at a glance

There are key differences that business owners should consider when choosing between LLCs and corporations, and between S-corps versus C-corps. It’s important to consider factors like company ownership, tax requirements, liability risks, ongoing requirements and distinct pros and cons.

What is an LLC?

A limited liability company (LLC) is a legal business structure that may provide personal liability protections for owners while offering some benefits of a corporation. This means that personal assets like your savings, house, or vehicle likely won’t be at risk if your LLC faces bankruptcy or lawsuits, though this protection isn’t absolute if you’re found to have “pierced the corporate veil” by failing to keep personal and business assets separate.

LLCs are pass-through entities, which means profits and losses can be passed through to your personal income. This can help you avoid state and federal corporation taxes, though you can elect to have your LLC taxed as a corporation to receive other benefits.

Due to their flexibility, LLCs are popular business structures.

Types of LLCs

There are multiple different types of LLCs that you can create. The most common options are single-member LLCs and multi-member LLCs, but some states also have other options available.

Single-member LLCs

Single-member LLCs are owned by a single member, which can be an individual, a corporation or a foreign entity. Unless these businesses elect to be taxed as a corporation, the business’s income is claimed on the owner’s personal tax returns using the owner’s Social Security number (SSN) or employer identification number (EIN).

Single-member LLCs are often created by sole proprietors who want to have a formal business structure that will offer protection for their personal assets, the potential for growth and the option to be taxed as a corporation down the road.

Multi-member LLCs

Multiple-member LLCs are limited liability companies owned by two or more members — they’re classified as a partnership for federal income tax purposes. Ownership is divided equally between each member by default when the LLC is formed, but you can divide profit and ownership stakes using an LLC operating agreement.

Other LLC types

While single-member and multi-member LLCs are the most common options, some states have additional options to choose from. In Nevada, you can create Restricted LLCs that provide the flexibility of a partnership but the liability protection of a corporation, and New Mexico has Anonymous LLCS that provide enhanced privacy for business owners. You can check with your state’s secretary of state office to see what options are available to you and what benefits they offer.

What is a corporation?

Corporations are legal entities that are owned by shareholders. They can be taxed, make profits and be found legally liable. Corporations will pay income taxes on their profits, and can pay out salaries to employees and dividends or profit to shareholders. While they do offer the strongest personal liability protection to their owners, they’re also more expensive to form and maintain, requiring extensive record-keeping and reporting.

Types of corporations

There are different types of corporations that businesses can choose from, but there are two that are particularly popular: C corporations and S corporations, each of which has their own pros and cons.

C corporation

C corporations (often called “C-corps”) are legal entities that are completely separate from their owners, granting significant personal protection from liability. While they do require more record keeping and extensive operational processes, they can also scale well, with options to go public or keep running without a hitch if shareholders come and go. As a result, they can be a good fit for businesses at higher risk for potential liability concerns or those that plan to grow aggressively, go public or those that are sold.

There is a risk, however, that corporations will be taxed twice (known as “double taxation”) – when the company first makes a profit and again when dividends are paid to shareholders on their personal tax returns.

S corporation

S corporations (often called “S-corps”) are a unique type of corporation that can prevent the double taxation that occurs with C-corps by allowing profits, and some losses, to be passed through directly to owners’ personal income without being subjected to corporate tax rates.

To qualify as an S-corp, a company must:

• Be a domestic corporation.
• Have no more than 100 shareholders.
• Have only one class of stock.
• Meet shareholder requirements. Shareholders must be individuals, certain trusts and estates. Shareholders cannot be partnerships, corporations or non-resident aliens.

Certain types of corporations — including financial institutions, insurance companies and domestic international sales corporations — are not eligible for S-corp status.

It’s important to note that a company must file with the IRS to receive S-corp status, which is an additional process from registering with their state. There is still extensive record-keeping and operational processes required, like with C corporations.

LLCs vs. Corporations: 4 key differences

LLCs and corporations all offer some level of personal asset protection and the potential for tax benefits, and require annual filing to remain active. That said, there are several key differences to keep in mind when choosing the right business entity structure for you.

1. Formation

The formation of corporations and LLCs alike will vary depending on state processes. That said, it’s often slightly easier to form LLCs, which typically only require simple applications through the state that ask for contact information about members and basic information about the work you’ll do.

Corporations, meanwhile, may have more extensive application requirements. You may need to obtain your articles of incorporation and create corporate bylaws. S corporations also need to file with the IRS to receive S-corp status.

2. Management structure

Limited liability companies have two options for management structures: Member-managed, or manager-managed. The former allows business owners to run the company, while the latter allows designated non-member managers (or a combination of members and non-members) to make business decisions.

Meanwhile, corporations may have shareholders, a board of directors and officers or executives who influence decisions within the organization. While shareholders are the owners of the company, the board of directors or executives may be responsible for day-to-day decision making. Officers and board directors can also be shareholders.

3. Taxation

Taxation varies significantly between LLCs and corporations.

LLCs are pass-through entities, and owners report the business’s income on their personal tax return, making LLC taxes quicker and easier to file than corporate taxes. This income is subject to the self-employment tax rate, but typically avoids corporate taxation.

Corporations, however, have much more extensive taxation requirements. Both S corporations and C corporations must file business tax returns. While S corporations allow some income and losses to be passed through to owners to avoid double taxation, C corporations may be taxed twice.

4. Maintenance

LLCs are much easier to maintain than corporations.

While the requirements vary by state, most LLCs only need to file an annual status report to remain active. In some states, this may be as simple as confirming no changes have been made to the business and paying an annual or bi-annual filing fee.

Corporations, however, require much more extensive record keeping and operational processes that can include carefully documented annual shareholder meetings, transparent and extensive financial records and a distinct separation between personal and business finances.

How to choose the right business structure

When choosing your business structure, it’s important to consider your short-term and long-term goals alongside which structures will benefit you most.

Many business owners start by forming an LLC for simplicity and flexibility. Since it’s a pass-through entity, there’s often less paperwork involved, and you don’t need to file corporate taxes. Others, however, may have aggressive growth plans from the beginning with eventual plans to go public and are concerned about significant liability risk. They may choose a corporation business structure as a result.

You should carefully weigh your options, considering each structure’s strengths and weaknesses when it comes to flexibility, ongoing filing requirements, tax benefits and potential personal protection and how these factors can impact your future business.

If you’re unsure which business structure would benefit you most, you can speak to an expert. Certified public accountants (CPAs), for example, can help you understand different business structure requirements, costs and potential tax savings. A lawyer can help you understand the legal implications of different business structures and how they affect your liability.

How long does it take to start an LLC?

The time it takes to form an LLC depends on your state’s application process. In many cases, the application process is straightforward. It takes an average of seven to 10 days in general, but may take several weeks in others. Some states may offer expedited approval processes for additional fees, which may offer faster turnaround times.

How long does it take to incorporate?

The amount of time it takes to incorporate depends on your state’s processes and the type of corporation you’re forming, but can take anywhere from a few days to a few weeks. In most states, however, you can incorporate in one to two weeks.