Many new business owners find themselves deciding between two options—LLC or corporation. This single choice affects how you’re protected from liability, how profits and losses are taxed, how decisions get made, and how easily you can raise money as you grow. Services like LegalZoom make it easier to compare and set up the right structure for your goals, budget, and growth plans.

This guide looks closely at where LLCs and corporations overlap and where they differ in practice. We’ll walk through core definitions, common types, pros and cons, and the real-world factors that should drive your decision—so you can choose confidently and avoid costly changes later.

What is an LLC?

A limited liability company—or LLC—is a state-created business entity that separates your personal assets from business liabilities while offering pass-through taxation by default. In other words, business profits and losses flow to the owners’ personal returns, avoiding a separate corporate income tax. Single-member LLCs are generally taxed as “disregarded entities,” and multi-member LLCs are taxed as partnerships unless you elect a different tax treatment. You can file an LLC yourself or let a service like LegalZoom handle state forms, operating agreements, and registered agent details for you.

LLCs are intentionally flexible in ownership, management, and taxation. One or more people (called “members”) can own an LLC, and members can be individuals or eligible entities. You can run the business yourself or appoint managers, and you can later elect S-corporation or C-corporation taxation if that better fits your tax planning.

When an LLC is formed, the acronym (or an accepted alternative) becomes part of the official name (e.g., Joe’s Flower Shop LLC, Joe’s Flower Shop Ltd., Joe’s Flower Shop Limited Liability Co.). Most states also recommend (or require) an operating agreement that spells out roles, profit allocations, voting rights, and buyout terms to protect everyone involved.

Types of LLCs

Not every LLC is the same. There are several variations you can form based on ownership, management style, location, and profession. Services like LegalZoom walk you through these options to ensure you choose the structure that matches how you plan to operate today—and scale tomorrow.

  • Single-Member LLC — A one-owner LLC. For federal taxes, the IRS treats an SMLLC like a sole proprietorship (pass-through). Income and deductible expenses appear on the owner’s personal return, and there’s no separate corporate tax return required unless you elect corporate taxation.
  • Multi-Member LLC — Owned by two or more members. By default, it’s taxed like a partnership, and the operating agreement defines each member’s equity, voting rights, and how profits and losses are allocated (these don’t have to be strictly proportional to ownership if properly documented).
  • Member-Managed LLC — The owners handle day-to-day decisions and operations. This is common for small teams that want direct control and minimal layers of management.
  • Manager-Managed LLC — One or more managers (who may or may not be owners) run operations. This works well when investors prefer a “silent partner” role or when the business needs professional management. Roles and authority live in the operating agreement.
  • Domestic LLC — An LLC formed and operating in the same state. Most small businesses start here because compliance is simpler and fees are paid to a single state.
  • Foreign LLC — An LLC registered in one state but doing business in another. For example, if you form in Delaware but operate in California, you’ll register as a foreign LLC in California and comply with both states’ rules and fees.
  • PLLC — A professional limited liability company used by licensed professionals (e.g., doctors, lawyers, accountants). Some states require that all owners hold the relevant professional license, and additional ethics or insurance rules may apply.

LLCs can fit into multiple categories at once—for example, a multi-member, manager-managed, domestic PLLC. Some states also offer a “series LLC,” allowing separate cells of assets and liabilities under one umbrella. If you’re unsure which combination fits your plans, LegalZoom.com can suggest a structure based on your goals and where you’ll operate.

What is a Corporation?

A corporation is a separate legal entity from its owners (shareholders). A corporation can have a single owner or many shareholders, and ownership is represented by stock. This structure is common for companies that may raise outside capital, offer employee equity, or eventually go public.

Some of the world’s most recognizable businesses are corporations (e.g., Microsoft Corporation, the Coca-Cola Company), but many small and midsize businesses incorporate as well for credibility, fundraising, or long-term growth.

Ownership is tracked through shares of stock. Corporations can be for-profit or not-for-profit. For-profit corporations may remain privately held or, if they meet listing requirements, become publicly traded so the general public can buy and sell shares.

While global giants grab headlines, small businesses incorporate too. Services like LegalZoom make startup steps accessible by packaging state filings, bylaws templates, registered agent services, and compliance reminders in one place.

Corporations are designed so that control does not rest with any one individual by default. Voting shareholders elect a board of directors. The board sets high-level direction, adopts bylaws, appoints officers (like CEO/CFO/COO), and oversees execution of the business plan.

Types of Corporations

Three common corporate types exist in the US. Here’s how they differ at a high level:

  • C Corporations — C corps pay corporate income tax separately from their owners. There’s no limit on shareholders, and multiple stock classes (common and preferred) are allowed. Shareholders may also be employees. A board of directors is required. This structure is typically preferred by venture capital and for companies that may go public.
  • S Corporations — An S corp is a tax election for an eligible domestic corporation. Income, losses, deductions, and credits pass through to shareholders’ personal returns (no corporate-level tax). Restrictions apply: generally one class of stock, a maximum of 100 shareholders, and only eligible shareholders (e.g., individuals who are US persons and certain trusts/estates).
  • Nonprofit Organization — A nonprofit exists to further a mission rather than distribute profits to owners. Surpluses must be reinvested into the mission. Qualifying nonprofits can apply for federal tax-exempt status (commonly 501(c)(3)) and must follow specific governance and reporting rules.

LLCs can also elect to be taxed as corporations (C or S) without changing their underlying legal form—they remain LLCs under state law. LegalZoom.com provides guided help if you’re planning a tax election or a broader restructuring.

Pros and Cons of LLCs and Corporations

Both structures deliver liability protection, but they differ in cost, complexity, flexibility, taxes, and fundraising. Understanding these trade-offs helps you match the entity to your goals. Platforms like LegalZoom also provide side-by-side comparisons to speed up the decision.

LLC Advantages

  • Pass-through taxation by default (no separate corporate return required unless you elect corporate taxation)
  • Personal liability protection for owners (when corporate formalities are respected)
  • Less ongoing paperwork and fewer formalities than corporations
  • Generally lower state filing and maintenance costs
  • Simpler operating structure that’s easy to customize in an operating agreement
  • No federal limit on the number of members; flexible ownership
  • Flexible profit distributions (allocations don’t have to match ownership percentages if properly documented)
  • Typically faster and easier to start than a corporation
  • Owners can retain direct control (member-managed) or appoint managers (manager-managed)
  • Straightforward maintenance; many states only require periodic reports and a registered agent
  • Option to elect S-corp or C-corp taxation later to optimize taxes

LLC Disadvantages

  • Active owners typically owe self-employment taxes on pass-through earnings (unless an S-corp election changes how compensation is treated)
  • Without clear operating-agreement provisions, events like an owner’s departure can create disruption or dissolution in some states
  • Harder to raise large amounts of venture capital compared to C-corps
  • May owe state-level franchise, gross receipts, or similar entity taxes depending on where you operate
  • Cannot issue stock; equity incentives are possible but typically more complex than stock option plans
  • Corporate-style income splitting strategies aren’t available without electing corporate taxation

Corporation Advantages

  • Strong liability protection for shareholders when corporate formalities are maintained
  • Generally easier to attract investors; familiar to VCs and private equity
  • Broader tax and benefits planning (e.g., certain fringe benefits at the corporate level, the ability to retain earnings in a C-corp)
  • Ownership is simple to transfer via stock sales
  • Perpetual existence (the company continues regardless of owner changes)
  • Stock and stock options can help recruit and retain top talent
  • Ability to sell stock to raise capital; potential to list shares publicly if requirements are met
  • Highly standardized structure and governance, which can build external credibility

Corporation Disadvantages

  • Potential for double taxation in C-corps (corporate tax on profits and personal tax on dividends)
  • Eligibility limits for S-corps (e.g., one class of stock, up to 100 eligible shareholders)
  • More formal governance requirements and less operational flexibility
  • Higher startup and ongoing compliance costs (bylaws, meetings, minutes, board actions)
  • More paperwork, record-keeping, and documented decision-making (resolutions)

LLC vs. Corporation: Key Differences Compared

Now that you’ve seen the advantages and drawbacks of each, compare them directly across formation, ownership, management, taxes, compliance, and liability. Use these lenses to decide which structure aligns with how you plan to operate and scale. If you want a second opinion or a quick checklist, LegalZoom.com has practical comparison tools and access to licensed professionals.

Business Formation

Both LLCs and corporations must be registered with the state. All 50 states recognize both structures (and variations of each). Your home state is usually the simplest choice unless you have clear reasons to register elsewhere.

To form an LLC, members file articles of organization with the state and create an operating agreement that defines ownership, voting, and how profits and losses are allocated. You can handle the paperwork yourself or have a trusted provider like LegalZoom prepare and file everything, including your registered agent.

Corporations file articles of incorporation, adopt bylaws, appoint a board, and issue shares. The board is responsible for governance and appoints officers to run operations. You’ll also set up a minute book and maintain formal records of major decisions.

Fees vary by state, but forming an LLC is generally less expensive at the outset and over time, especially if you prefer fewer governance formalities.

Ownership

Ownership works differently across the two structures.

LLCs offer broad flexibility. You can have one or many members, and ownership percentages and profit allocations can be customized in the operating agreement to reflect how you actually work together.

Corporations can have a single shareholder or many. Ownership is represented by stock, which can be bought and sold. C-corps have no shareholder limit and can create multiple stock classes; S-corps are capped at 100 eligible shareholders and must have one class of stock.

Because stock is familiar to investors and employees, corporations are typically better suited for raising venture capital and offering equity-based compensation.

Management Structure

LLCs are flexible. You can be member-managed (owners run the business) or manager-managed (appointed managers run operations). These choices live in the operating agreement and can be updated as you grow.

Corporations follow a more formal hierarchy. Shareholders elect a board; the board appoints officers (CEO, CFO, etc.) to run day-to-day operations. This structure enforces checks and balances but adds formalities and documentation.

Shareholders may serve on the board and may be officers, subject to the bylaws and any conflicts-of-interest rules.

In short, LLCs emphasize agility; corporations emphasize standardized governance that outsiders (like investors) expect.

Taxation

LLCs are the most flexible for taxes. By default, single-member LLCs are taxed like sole proprietorships and multi-member LLCs like partnerships. Members usually pay self-employment taxes on active income. You can elect S-corp or C-corp taxation if that reduces your overall tax burden, provided you meet eligibility rules and file the proper elections.

S-corps don’t pay corporate-level tax; income passes through to shareholders, who report it on personal returns. C-corps can access a broader set of deductions and may retain earnings for reinvestment, but distributions to shareholders (dividends) are taxed again at the individual level.

Qualified nonprofits can apply for federal tax-exempt status and follow specific reporting rules to maintain it.

Formal Requirements and Compliance

Both LLCs and corporations must meet state compliance requirements: annual or biennial reports, keeping a registered agent, and paying any franchise or similar taxes. Staying compliant keeps you in good standing and preserves liability protections. LegalZoom offers registered agent services and compliance alerts so you don’t miss key deadlines.

Corporations face more formalities: annual shareholder meetings, regular board meetings, recorded minutes, and written resolutions for major decisions. These rules create a solid paper trail but take time and discipline.

LLCs generally avoid these formalities. Many states only require a simple periodic report and fee, though you should still keep clean records and separate business finances to maintain liability protection.

Liability Protection

Both LLCs and corporations are separate legal entities, which means owners are typically not personally responsible for business debts and lawsuits.

Protection isn’t absolute. Courts can “pierce the veil” if owners commingle funds, undercapitalize the business, commit fraud, or ignore required formalities. Keep separate bank accounts, follow your governing documents, and document key decisions.

When you follow the rules, shareholder and member liability is usually limited to what they’ve invested in the company—personal assets remain shielded.

How to Decide: A Step-by-Step Framework

Use this quick framework to translate your goals into the right structure. Work through each step in order; your answers will usually point clearly toward an LLC, an S-corp election for an LLC or corporation, or a C-corp.

  1. Clarify the next 24–36 months. Are you optimizing for simplicity, liability protection, and tax efficiency as a small team—or building to raise outside money and scale headcount quickly?
  2. Map ownership. How many owners will you have now and later? Will you invite advisors or contractors into equity? If you need multiple equity classes or plan to grant stock options broadly, a corporation (usually a C-corp) is the cleanest fit.
  3. Model taxes. Estimate expected profit and how you’ll pay yourself. Pass-through LLCs keep filings simple but may trigger self-employment taxes on active income. An S-corp election (for an eligible LLC or corporation) can reduce payroll tax exposure by splitting “reasonable salary” and distributions. C-corps can retain earnings but dividends are taxed again to shareholders.
  4. Gauge compliance appetite. If you prefer minimal formalities, an LLC is lighter-weight. If you’re comfortable with bylaws, minutes, and board actions because it helps with fundraising and credibility, a corporation works well.
  5. Decide on fundraising. If venture capital is likely, a Delaware C-corp with standard docs is the default. If you’ll stay bootstrapped or raise modest angel checks, an LLC (with or without an S-corp tax election) often suffices.
  6. Check state costs and taxes. Compare your home state’s formation fees, annual reports, and franchise or gross-receipts taxes. Foreign-qualifying in multiple states adds complexity and ongoing fees.
  7. Plan hiring and benefits. Corporations tend to offer standardized stock/option plans and some fringe benefits at the entity level. LLCs can do equity, but the mechanics are more complex (e.g., profits interests, special allocations).
  8. Note deadlines. If you want S-corp treatment, file the election on time (generally within 2 months and 15 days after the start of the tax year, or with on-time relief for new entities). Missed timing can delay tax changes to next year.

Common Scenarios and Likely Fits

  • Solo consultant or creator with profitable services — Start as a single-member LLC for simplicity; consider an S-corp election once profits exceed what you’d reasonably pay yourself in W-2 wages.
  • Two to four co-founders, product in development, no VC yet — Multi-member LLC for flexibility and low overhead, or incorporate early if you’ll issue options, join an accelerator, or expect institutional investors.
  • Venture-backed startup targeting rapid scale — Delaware C-corp with a board, multiple stock classes, and a standard option pool; most VCs require this.
  • Main-street business (ecommerce, agency, boutique, local services) — LLC is usually enough: straightforward filings, pass-through taxation, and modest formalities. Add S-corp election if the tax math supports it.
  • Mission-driven organization seeking grants/donations — Incorporate as a nonprofit corporation and apply for the appropriate federal tax-exempt status; expect specific governance and reporting rules.

Costs, Documents, and Timelines (At a Glance)

Exact numbers vary by state, but expect these categories regardless of structure. Building a simple checklist up front helps you avoid missed filings and surprise fees.

  • Formation filings — Articles of organization (LLC) or articles of incorporation (corporation) with state fees.
  • Governing documents — Operating agreement (LLC) or bylaws plus initial board resolutions (corporation).
  • Registered agent — Required in most states; simplifies service of process and compliance reminders.
  • EIN — Federal employer identification number for banking, payroll, and tax filings.
  • Equity records — Membership interests and allocations (LLC) or stock ledger, option grants, and 83(b) elections where applicable (corporation).
  • Ongoing compliance — Annual/biennial reports, franchise or gross-receipts taxes where applicable, and documented minutes/resolutions (more extensive for corporations).
  • Multi-state operations — Foreign qualification, additional registered agents, and extra reports/fees in each state where you “do business.”
  • Turnaround — Many states process filings in days; expedited options may be available. Services like LegalZoom package filings, registered agent, and compliance tracking to keep everything in one place.

Changing Course Later

You can adjust as the business evolves, but plan carefully—changes can trigger tax or legal consequences and may require new filings in every state where you operate.

  • LLC to S-corp (tax only) — Keep the LLC legal form, file the S-corp election for eligible entities, start paying a reasonable salary through payroll, and document distributions.
  • LLC to C-corp (legal conversion) — In “statutory conversion” states, you can convert by filing state forms. Elsewhere, you may form a new corporation and merge or contribute LLC assets/membership interests in exchange for stock.
  • C-corp to S-corp (tax election) — If eligible, file the S-corp election; confirm shareholder limits and single-class-of-stock requirements first.
  • Equity cleanup — When converting, update cap table records, option plans, and any investor agreements. Get signatures and board or member approvals per your governing documents.
  • State and federal updates — Amend registrations, foreign qualifications, and payroll/tax accounts to reflect the new structure or tax status.

If you’d like guided filings, state-by-state instructions, and reminders for the next deadlines, a formation and compliance platform such as LegalZoom can streamline the paperwork so you can focus on running the business.

LLC vs. Corporation by Business Model: Practical Examples

Abstract pros and cons are useful, but decisions get easier when you see how entity choice plays out for specific business models. Use the examples below to map your situation to a likely fit—and the next actions to take so you can file with confidence.

Bootstrapped Services (Consulting, Agency, Creative Studio)

Typical fit: Single-member or multi-member LLC, often with an S-corp tax election once profits justify W-2 wages. You’ll get simple governance and pass-through taxation, with the option to reduce payroll tax exposure by splitting reasonable salary and distributions after you elect S-corp treatment (for an eligible LLC).

  • Why it works: Flexible profit splits, light compliance, and easy onboarding/offboarding of partners via your operating agreement.
  • Watch-outs: Commingling funds, missing quarterly taxes, and not documenting member decisions. Maintain a separate bank account and adopt a clear operating agreement from day one.
  • Next steps: Form the LLC, get an EIN, open a business bank account, and draft an operating agreement. When net profit consistently exceeds what you’d reasonably pay yourself in wages, consider an S-corp election. A provider like LegalZoom can package filings and registered agent service in one place.

Ecommerce and Omnichannel Retail

Typical fit: LLC at launch for speed and cost control; consider S-corp tax election as profits grow. If you plan to raise equity capital or offer employee options broadly, incorporate as a C-corp sooner rather than later.

  • Why it works: Early ecommerce ops benefit from operating-agreement flexibility (e.g., special profit allocations for a logistics-heavy partner). If you later pursue investors, migrating to a C-corp standardizes stock, options, and investor rights.
  • Watch-outs: Multi-state sales may trigger “doing business” in more than one state—foreign-qualify the entity and track sales tax nexus. Keep inventory and merchant accounts in the company’s name to preserve liability protection.
  • Next steps: Start with an LLC, operating agreement, and resale certificates where needed. If investor conversations heat up, evaluate a conversion timeline to a C-corp and clean cap table records before you sign term sheets.

Software and Venture-Backed Startups

Typical fit: Delaware C-corp with a board, standard bylaws, multiple stock classes, and an option pool. This aligns with investor expectations and simplifies equity compensation and future financing rounds.

  • Why it works: Preferred stock, protective provisions, and standardized documents enable efficient VC deals. Perpetual existence and transferable shares aid hiring and exits.
  • Watch-outs: Additional compliance (minutes, resolutions, annual meetings) and potential double taxation if/when you pay dividends. Manage this by retaining earnings for growth and planning compensation strategically.
  • Next steps: Incorporate, adopt bylaws, appoint a board, issue founder stock with vesting, and set up the option pool. Use a formation platform like LegalZoom for filings and registered agent, and work with counsel on equity and IP assignments.

Real Estate Holding and Rentals

Typical fit: Separate property-specific LLCs (or a series LLC where available) to isolate liabilities by asset. Management can be centralized through a manager-managed structure.

  • Why it works: Pass-through taxation preserves depreciation and other real-estate benefits, while entity separation helps shield other assets from tenant or premises liability.
  • Watch-outs: Lender requirements, insurance endorsements, and due-on-sale clauses. Confirm that each property’s title, loan, and insurance correctly list the LLC.
  • Next steps: Form an LLC per property (or evaluate series LLC rules in your state), obtain EINs as needed, and maintain dedicated bank accounts. Document management authority in the operating agreement.

Creators, Course Businesses, and Media Sites

Typical fit: Single-member LLC for simplicity, with an S-corp election as profits increase. This setup works well for brand deals, digital products, and ad/affiliate revenue while keeping governance light.

  • Why it works: Pass-through taxation and straightforward bookkeeping. As margins expand, you can optimize payroll taxes via an S-corp election (for an eligible entity) while maintaining liability protection for contracts and intellectual property.
  • Watch-outs: Platform contracts, personal guarantees, and IP ownership. Ensure content, trademarks, and domains are owned by the company—not you personally.
  • Next steps: Form the LLC, register trademarks as your brand grows, and use the entity for all contracts and payouts. Revisit tax elections annually with a qualified professional.

Quick Checklist to Pressure-Test Your Choice

  1. Forecast profit for the next 12–24 months and how you’ll pay yourself (salary vs. distributions).
  2. Map equity: owners now and later, planned advisors, and whether you’ll need multiple stock classes or options.
  3. Confirm state costs: formation fees, franchise/gross-receipts taxes, and foreign-qualification exposure.
  4. Document governance: operating agreement (LLC) or bylaws/board actions (corporation) before any money changes hands.
  5. Protect the veil: separate banking, clean bookkeeping, and written resolutions for major decisions.
  6. Calendar elections if you want S-corp treatment—file on time and set up payroll for reasonable compensation.
  7. Line up support: registered agent, compliance reminders, and state-by-state guidance from a platform like LegalZoom.

LLC or Corporation: Which is Right For Your Business?

If you want control, flexibility, and simpler compliance, an LLC is often the better fit. It’s fast to form, cost-effective to maintain, and you can adjust tax treatment later if your needs change.

If you plan to raise venture capital, issue stock and options broadly, or aim for an IPO or acquisition, a corporation—typically a C-corp—tends to be the standard path that investors expect.

Corporations also make it straightforward to transfer ownership via shares and to implement formal boards and policies—useful as headcount and stakeholder complexity grow.

Before you file, talk with a qualified tax professional and attorney about your plans, state rules, and the total cost of ownership over time. If you’re ready to get started with guided formation, tax setup, and ongoing compliance, check out LegalZoom for step-by-step help.