LLC vs Corporation

Both a limited liability company (LLC) and a corporation (Inc) allow you to protect your personal assets, but most small businesses choose to Form an LLC. This is because LLCs offer more tax savings and LLCs are easier to start and manage.

Our LLC vs. Corporation guide below will help you understand the difference between an LLC and corporation.

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Difference Between an LLC and Corporation

A limited liability company (LLC) is usually the best business entity type for small businesses because it offers personal liability protection but is easy to run and has tax options that fit well with how small businesses operate and grow.

Personal liability protection provides legal separation between you and your business and can protect your personal assets if your business is sued.

A corporation offers personal liability protection but has complex operational procedures and tax options that don’t provide tax advantages to most small businesses.

Only small businesses and startups that need to attract outside investors or carry over large amounts of profit from year to year should form a corporation.

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LLC vs Corporation Taxes

If you expect to spend most of your profit to pay LLC members/owners and grow your small business, an LLC is the right choice. This is because of how an LLC is taxed compared to a corporation.

LLC Taxes: Pass-Through Taxation

Pass-through taxation means the net income (net profit minus expenses) of the business passes through to the LLC member(s) individual tax returns. This means the business itself will not be taxed and the owner(s) will only have to pay taxes on their portion of the net income and on any dividends (distributions) they receive. 

LLCs and Profit Carryover

It’s rare for a small business to carry over large amounts of profit from one year to the next, year over year. But in the event that this happens, LLC pass-through taxation wouldn’t be the best choice. This is because the profit would be taxed at the individual taxpayer’s tax amount (which is normally higher than the 21% tax rate paid by corporations).

LLCs and Investors

LLC pass-through taxation isn’t an advantage to investors. In pass-through taxation, an investor would have to pay taxes on their portion of annual profit carryover, even if they didn’t get any form of payment from the LLC. This is why investors prefer corporations. 

Corporation Taxes

A corporation's net income is taxed once on the corporate level at 21%. If any of that profit is paid as dividends to shareholders, they pay income tax and FICA taxes on the dividend as well.

This is referred to as “double taxation.”

Investors and Venture Capitalists

If you need to attract investors, starting a corporation would be the best choice (and usually the only choice) for your small business or startup.

An investor in a corporation pays taxes on dividends only when they receive them whereas an investor in an LLC would have to pay taxes regardless of whether they received a distribution or not. The LLC investor might never see a return on their investment but might have to pay taxes every year regardless. This is why investors prefer C corps.

Corporations and Profit Carry Over

Most small business owners either reinvest profit to grow the business or take draws or distributions from the business to pay themselves. Usually, there isn't much profit left to carry into the next tax year.

A corporation is taxed at about 21% for all profits that carry over to the next tax year. In this same scenario, an LLC member's tax burden would be greater because they pay FICA taxes and federal and state income taxes, which are higher than the 21% corporate rate.

That said, a business owner who anticipates needing to carry profit into the next tax year should look closely at the financial benefits of forming a corporation.

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LLC vs Corporation: Formation and Maintenance

Limited liability companies (LLCs) are a simple business structure: they require less paperwork, have less administrative overhead, and are much easier to start and maintain than a corporation. 

LLCs are also adaptable and can elect to become corporations at a later date. This makes LLCs a great starting point for your business to grow.

If the benefits (e.g., attracting investors, etc.) of managing a complex business structure outweigh the costs, starting a corporation could make sense for your small business.

Corporations are more complex organizations compared to LLCs, with increased administrative overhead, more paperwork, and complex compliance requirements. Managing a corporation may require help from an attorney or accountant, which can increase overall business costs.

To learn more about running a corporation, visit our How to Start a Corporation guide.

LLC vs S Corp: When to Elect S Corp Status

An LLC taxed as an S corporation (S corp) is the best choice for a small business if:

  • The business generates enough profit to pay the business owner a "reasonable salary"
  • The business owner expects to pay themselves significant distributions year over year
  • The Business owner can reach the break-even point between payroll costs and tax savings
  • The business doesn’t need to attract investors (investors=corporation)
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LLC vs Corporation FAQ

LLC vs inc: which is better?

LLCs are much easier to start and run than a corporation and LLCs generally offer better tax options for small businesses. We recommend that most small businesses form an LLC vs corporation.

There are two scenarios in which forming a corporation is a good choice: 

A corporation, or Inc, is better for small businesses and startups that need to attract investors.  

Starting a corporation is the right choice for businesses that will consistently carry over large amounts of profit from one year to the next (although this is uncommon for a small business).

Learn more in our LLC vs Corporation guide.

What are the disadvantages of an LLC?

An LLC isn’t the best business structure for attracting investors or for carrying over large sums of profit from year to year. This is because of the way LLCs are taxed.

Visit our Choosing a Business Structure guide for help deciding which type of business entity is best for your small business.

Do corporations pay more taxes than an LLC?

In most scenarios, a small business will pay more in taxes as a corporation vs. LLC.

A corporation business owner pays taxes once on their portion of the business’s profit after deductible expenses. Then, the business owner will also pay taxes on any dividends paid to them. 

This is referred to as double taxation, and in most instances, it’s not the best tax setup for a small business. 

There are two exceptions to this rule:

  • A corporation, or Inc, is better for small businesses and startups that need to attract investors.  
  • Starting a corporation is the right choice for businesses that will consistently carry over large amounts of profit from one year to the next (this is uncommon for a small business).

Learn more in our LLC vs Corporation guide.

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