The Difference Between an LLC and a Corporation

Choosing the right business structure is one of the most important legal and financial decisions an entrepreneur can make. Both Limited Liability Companies (LLCs) and corporations offer liability protection, but they differ in significant ways—from tax treatment and management to fundraising and regulatory compliance.

This guide breaks down the key differences, benefits, and drawbacks of LLCs and corporations to help you choose the best fit for your business vision.

For foundational steps, explore RocketPages’ guide to starting an LLC and business formation essentials.

1. Ownership and Management Structure

LLC:

• Owners are called "members" (can be individuals, other companies, or foreign entities).
• Offers flexible management: members can run the business themselves or appoint managers (member-managed vs. manager-managed).
• No need for a board of directors or officer roles.
• Ideal for small businesses, family-owned operations, or professional freelancers who want simplicity and direct control.

Corporation:

• Owned by shareholders, who elect a board of directors.
• The board appoints officers (CEO, CFO, etc.) to run daily operations.
• Required to follow a structured hierarchy with formal roles and responsibilities.
• Well-suited for larger businesses, especially those planning to scale quickly, raise capital, or go public.

For legal context, the U.S. Small Business Administration (SBA) offers a breakdown of ownership structures.

2. Taxation and IRS Treatment

LLC:

• Default treatment is pass-through taxation: the LLC itself doesn’t pay federal income tax. Instead, profits and losses flow to the members’ personal tax returns, avoiding double taxation.
• Members pay self-employment taxes (Social Security and Medicare) on business income.
• Option to elect corporate tax treatment:
• C corporation status to retain profits within the business at a lower flat rate.
• S corporation status (if eligible) to potentially reduce self-employment tax burden.

Corporation:

• C Corporation (default):
• Subject to double taxation: the corporation pays taxes on profits, and shareholders pay taxes on dividends.
• Advantage: profits can be reinvested at the corporate tax rate (21% federal as of now).
• S Corporation (if elected and qualified):
• Pass-through taxation (like an LLC).
• Limit of 100 shareholders, all of whom must be U.S. citizens or residents.
• Cannot be owned by other corporations or many types of trusts.

Visit the IRS Business Structures Guide to learn more about entity-level taxation rules.

3. Formation and Ongoing Compliance

LLC:

• Formation requires filing Articles of Organization with the state and creating an Operating Agreement (internal rules, not usually filed publicly).
• Fewer formalities: no requirement for annual meetings or detailed minutes.
• Generally fewer annual filing obligations and lower compliance costs.

Corporation:

• Formation requires Articles of Incorporation and adoption of corporate bylaws.
• Must maintain corporate formalities, including:
• Annual shareholder and board meetings
• Detailed meeting minutes and resolutions
• Issuance of stock certificates
• Often subject to higher annual fees and reporting obligations depending on the state.

Need help staying compliant? Check RocketPages’ guide to business legal requirements.

4. Fundraising and Investment Opportunities

LLC:

• Ownership interests are called "membership units" or percentages.
• Cannot issue stock.
• Funding usually comes from members or private lenders.
• Investors may be less familiar with LLC structures, which can deter venture capital interest.

Corporation:

• Can issue stock (common and preferred), making it easier to:
• Raise funds from angel investors or venture capitalists
• Offer employee stock options
• Eventually pursue an IPO (Initial Public Offering)
• Preferred by institutional investors for its predictability and structure.

Planning to scale or raise external capital? A corporation may be the better long-term choice.

5. Liability Protection

LLC:

• Members are generally not personally liable for business debts or lawsuits.
• Limited liability is upheld if business and personal finances are kept separate and the LLC observes basic compliance.

Corporation:

• Offers strong liability protection for shareholders and directors.
• Courts can “pierce the corporate veil” if the corporation:
• Fails to follow legal formalities
• Commits fraud or abuses the corporate structure

For protection strategies, see RocketPages’ article on legal risk management.

6. Ideal Scenarios for Each Structure

Choose an LLC if:

• You’re a freelancer, consultant, or small business owner who wants a simpler tax setup.
• You plan to keep ownership in a small circle.
• You want flexibility in management and fewer reporting requirements.
• You’re not seeking venture capital or issuing shares.

Choose a Corporation if:

• You’re starting a business that needs outside investment.
• You plan to issue stock or grow rapidly.
• You want to offer stock-based compensation to employees.
• You're considering going public in the future.

Legal Considerations: LLC vs. S Corp

Many business owners choose to form an LLC but elect to be taxed as an S corporation—especially if they expect high profits and want to reduce self-employment taxes. However, this structure comes with more IRS scrutiny and eligibility requirements.

A knowledgeable business attorney or CPA can help you evaluate:

• Eligibility for S corp election
• Long-term tax implications
• State-specific rules and benefits

Key Takeaways

• LLCs offer flexibility, simplicity, and pass-through taxation—ideal for smaller or family-run businesses.
• Corporations provide stronger infrastructure for growth, easier access to capital, and greater appeal to investors.
• Both structures protect personal assets, but require different levels of formalities and tax planning.
• Consider your growth goals, investor needs, and compliance capacity before choosing.