LLC vs. C Corporation: What's the Difference?
LLCs and C Corporations are two of the most common business entities available to entrepreneurs in the US. If you're ready to launch a business, you may not be sure what each of these business structures are or what it means for you as a founder.
The type of company you choose to incorporate is one of the most important decisions you'll make in the early stages. In this article, we'll walk you through the key differences between LLCs and C Corporations and explain some situations where each one might make more sense for a particular business.
In this article:
- LLC vs. C Corporation: The basics
- LLC vs. C Corporation: Comparison
- LLC vs. C Corporation: Advantages and Disadvantages
- Bottom line: How to choose
Looking for a quick recommendation? Check out our LLC vs. C-Corp quiz to see which option is right for you. We'll even help you decide which state to incorporate in!
LLC vs. C Corporation: The Basics
Both LLCs and C Corporations allow founders and their partners to limit their responsibility to company debts and liabilities. This means that the debts and liabilities of the business are separate from those of the members, or owners, on a personal level.
To illustrate what this means, let's take an everyday example. Imagine you get into a fender bender on the way to work. If the accident was your fault, the other driver could sue you for damages.
Without an LLC, C-Corp, or other legal entity, damages related to your business would work the same way. Since there's no "business" to sue, the other party would only be able to sue you personally. Your home, car, and other assets could be on the line.
Once you incorporate a business, the business's activities are considered separately from your personal activities. If the company is sued, only the company's assets can be taken to pay off debts, settlements, or judgments against you. This is a critical layer of protection for any founder. While there are some legal differences between the two business structures, LLCs and C-Corps generally work similarly when it comes to liability protection.
With both options offering limited liability, the decision between an LLC and a C-Corp comes down to other factors. These include the ownership and management structure of your business, your personal and company goals, and your potential tax obligations.
A Limited Liability Company (LLC) is a business structure formed by members (rather than shareholders) who all pay taxes as a share of personal income, often referred to as a “pass-through” tax structure. While the LLC protects the members from liability, income is still treated as the income of the individual members, not the income of the business itself. Note that LLCs still have the option to file taxes as corporations if they elect to file Form 2553.
A C Corporation (C-Corp) is a legal entity known for its “double taxation,” where the C Corporation pays corporate income taxes and shareholders pay personal income taxes based on gains made from dividends or the sale of C Corporation stock. Let's take a closer look at the distinction between an LLC and a C-Corp.
LLC vs. C Corporation: Comparison
It’s always important to consider your long-term and short-term goals before choosing between an LLC and a C Corporation. Both structures offer different advantages and disadvantages, from taxes and regulations to management and ownership structure. The chart below lays out some of the most important differences.
Once you choose between an LLC and a C-Corp, the next step is deciding which state to incorporate the business in. While we generally recommend Wyoming for LLCs and Delaware for C-Corps, there are naturally benefits and drawbacks to both. Click here to learn more about the pros and cons of incorporating in Wyoming and Delaware.
Advantages of an LLC
1. Pass‑through taxation keeps profits single‑taxed
An LLC is treated as a pass‑through entity by default, so business income “passes through” to the members’ personal returns instead of being taxed at both the entity and shareholder levels. That structure avoids the double‑tax hit faced by C‑corporations and lets owners book losses on their own returns during the early, unprofitable years.
2. Flexible tax classification
Members are not locked into one tax regime. They can elect to be taxed as a disregarded entity, partnership, S‑corporation, or even a C‑corporation, depending on what saves the most money or simplifies compliance as the company grows.
3. Lightweight governance and paperwork
State LLC statutes impose far fewer formalities; no mandatory board, no annual shareholder meetings, and minimal reporting, so founders spend less time on minutes and more time on operations. The lighter process also makes formation quicker and cheaper in most states.
4. Limited liability protection
Like corporations, an LLC creates a liability shield around its members. Personal assets stay protected from most business debts and court judgments as long as basic corporate‑veil disciplines are observed.
Disadvantages of an LLC
1. Harder to raise venture capital or issue stock options
Venture funds, accelerators, and many angel investors insist on a C‑corp structure so they can receive preferred shares and standardized investor protections. LLC membership interests and K‑1 tax reporting create friction, which means many startups wind up converting before a priced round.
2. Self‑employment and payroll tax exposure
All distributed profits are generally subject to self‑employment tax for active members. Unlike a C‑corp salary, there is limited scope to manage FICA burdens through reasonable‑compensation strategies.
3. State‑by‑state inconsistencies
Every state writes its own LLC rules. Multi‑state operations may juggle different annual report dates, franchise‑tax calculations, and even dissolution triggers, adding legal overhead that does not exist for a Delaware‑based corporation.
Advantages of a C-Corporation
1. Investor‑friendly capital structure
A C‑corp can authorize multiple classes of stock, grant option pools, and accept an unlimited number of domestic or foreign shareholders. That flexibility explains why almost every VC‑backed startup incorporates (or reincorporates) as a Delaware C‑corp.
2. Eligibility for Qualified Small Business Stock (QSBS)
Shareholders who hold qualified C‑corp stock for at least five years may exclude up to 100 % of capital gains (subject to caps) when they exit, creating a powerful tax incentive for both founders and early investors.
3. Perpetual existence and easy share transfer
Ownership changes do not dissolve the entity; shares trade hands while the corporation lives on, supporting long‑term succession, public offerings, and M&A deals. Public perception of permanence also boosts credibility with larger customers and lenders.
4. Retained earnings flexibility and fringe benefits
Profits can remain inside the corporation and be reinvested at the 21 % federal rate instead of flowing to owners at personal marginal rates. The structure also supports deductible fringe benefits like health plans, retirement contributions, and more, which are harder to deliver through an LLC.
Disadvantages of a C-Corporation
1. Double taxation of distributed profits
Corporate income is taxed first at the entity level, then again when dividends reach shareholders. While retaining earnings mitigates the impact, any distribution still faces the two‑layer tax cost.
2. Higher administrative burden and cost
C-corporations must draft bylaws, elect and meet with a board, maintain formal minutes, file separate federal and state returns, and prepare detailed annual reports. Legal and accounting fees typically exceed those for an LLC, especially in the startup phase.
3. Losses stay trapped inside the entity
Shareholders cannot deduct corporate operating losses on personal returns, which can be a cash‑flow concern for bootstrapped ventures that run at a loss before product‑market fit.
The Bottom Line
Both LLCs and C Corporations have their unique advantages and disadvantages, so it’s important to understand how these apply to your business goals.
LLCs are generally a great option for small businesses because they are more flexible, meaning you can make your own rules and tailor your entity to suit the intricacies of your business. You also won't have to worry about corporate tax or regulatory requirements that are applied to C-Corps. LLCs are also ideal for ecommerce businesses.
LLCs don’t have shares, so you won’t be able to issue stock or go public. Still, many well-known companies are LLCs, including Basecamp and Mailchimp. Clearly, you can still grow an LLC as long as you're OK with not issuing equity.
If you’re a tech or startup founder looking to raise capital from investors, incorporating as a C Corporation will give you more options and the ability to issue stock and manage your capitalization table.
Whichever business entity you choose, our team is here to guide you through the process. Hit the link below to start your incorporation today, or take our LLC vs. C-Corp quiz to make an informed decision for your business.