LLC vs Corporation

An LLC and a corporation are both separate legal entities that protect your personal assets from the company's debts. So the real choice between them is about tax. By default, an LLC is taxed once, on the owners' personal returns. A C corporation pays its own 21% federal tax, and its owners pay tax again on dividends.

In practice the choice usually looks like this:

• A solo owner or a small service business usually forms an LLC. It has fewer formalities and one level of tax.
• A profitable LLC owner with a large self-employment tax bill may want to discuss an S corp election with an accountant.
• A startup that plans to raise investor money or offer stock options usually forms a C corporation.
• A non-US owner chooses between an LLC and a C corporation. S corp status isn't available to nonresident aliens.

So we'll go through the decision the way it tends to unfold, from the formation form to the yearly bills that follow.

The form in front of you: legal form and tax status

Much of the confusion at this first step comes from mixing two different choices. The first is the legal form. You create it with a state, usually through the Secretary of State's office. The second is the tax status, which decides how the IRS taxes the business.

In an LLC, the owners are called members. State rules vary, but members can include:

1. individuals
2. corporations
3. other LLCs
4. foreign entities

The LLC's internal rules sit in an operating agreement, which is a private document.

A corporation ("Inc." or "Corp.") is set up differently:

1. The owners are shareholders who hold stock.
2. A board of directors oversees the company.
3. Officers run the daily work.
4. The internal rules are called bylaws.

Then comes the tax side, with four options:

1. disregarded entity (taxed through its single owner)
2. partnership
3. C corporation
4. S corporation

A corporation is taxed as a C corporation unless it elects S status. An LLC is a disregarded entity or a partnership by default. But it can elect to be taxed as a C corporation or an S corporation.

So an LLC can be an "S corp" for tax purposes and still be an LLC under state law. That's why searches like "LLC vs sub S corporation" or "LLC partnership vs LLC corporation" are really about tax status.

LLC vs corporation side by side

Once you keep those two choices apart, the main differences fit in one table. Most owners come back to it more than once while they decide.

The first tax season: how an LLC and a corporation are taxed

Liability protection is similar in both structures. So for most owners, the first tax season is where the difference really shows.

If you chose an LLC

The IRS treats a domestic LLC with one member as a disregarded entity. For income tax, the profit goes on the owner's own return. For employment taxes and certain excise taxes, the single-member LLC is still a separate entity.

An LLC with two or more members is taxed as a partnership by default. It files Form 1065 and passes each member's share of the profit to their own return. In both cases the profit is taxed once.

The line that surprises many new LLC owners is self-employment tax. The SBA notes that LLC members count as self-employed and must pay it. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.

A few details decide the amount:

• It's calculated on 92.35% of net earnings.
• You file Schedule SE if those earnings are $400 or more.
• The 12.4% Social Security part applies only up to the wage base. That's $184,500 in 2026 ($176,100 in 2025).

On top of that, an Additional Medicare Tax of 0.9% applies above these amounts:

• $200,000 for single filers
• $250,000 for married couples filing jointly
• $125,000 for married people filing separately

The calculation is explained in Self-Employment Tax: How It Works and How to Calculate It.

If you chose a C corporation

A C corporation is a separate taxpayer. It files Form 1120 and pays a flat 21% federal tax on its profit. That rate applies to tax years beginning after December 31, 2017.

The corporation can't deduct the dividends it pays. So profit is taxed once at the company and again when shareholders get it as dividends. This is what people mean by double taxation.

All taxable dividends are ordinary income, but qualified dividends are taxed at the lower capital gain rates. Shareholders also can't deduct the corporation's losses on their own returns.

We worked out an example ourselves, using only the 21% federal rate and no state tax. Say your C corporation has $100,000 of profit. It pays $21,000 in corporate tax and keeps $79,000. If it pays the $79,000 to you as dividends, you then pay personal tax on that amount. Your actual tax depends on your income and state.

If you elected S corporation status

An S corporation's income is generally taxed to the shareholders, not to the corporation itself. An S corp can still owe tax on certain kinds of income, though. The company files Form 1120-S, and the owners report their shares on their own returns.

For a small owner, the main rule is about pay. Shareholders who work in the business are employees. Their pay must be reported as wages at a level of reasonable compensation, with payroll taxes and withholding. The IRS has said that calling that pay distributions to avoid those taxes isn't acceptable.

Owners still choose S status for one reason. In a default LLC, all of a member's profit is usually subject to self-employment tax. In an S corporation, payroll taxes apply to the wages. Whether that difference outweighs the cost of payroll and an extra return depends on the profit. An accountant can work it out from your real figures.

A deduction you may qualify for

The QBI deduction lets owners deduct up to 20% of their qualified business income. It's open to owners of these businesses:

• sole proprietorships
• partnerships
• S corporations

That includes LLCs taxed as a partnership or a disregarded entity. Income earned through a C corporation isn't eligible.

According to the Texas Society of CPAs, a 2025 federal law (the OBBBA) made the deduction permanent starting with tax year 2025. So guides that say it ends after 2025 are out of date.

When your LLC wants to be taxed as an S corporation

An LLC can elect S corporation status by filing Form 2553. It doesn't also need Form 8832. It's treated as a corporation from the date the S election takes effect. An LLC that wants to be taxed as a C corporation files Form 8832, the Entity Classification Election.

Both forms have strict timing rules:

1. Form 2553 is due no more than 2 months and 15 days after the start of the tax year the election covers. You can also file it any time during the year before.
2. The IRS offers late-election relief for a Form 2553 filed within 3 years and 75 days of the intended effective date.
3. A Form 8832 election generally can't take effect more than 75 days before the filing date. It also can't take effect more than 12 months after it.

The full comparison is in LLC vs S Corp.

The dates that go in your calendar

The single-member LLC here is a disregarded entity, and the multi-member LLC is taxed as a partnership. The S corporation row includes an LLC with an S election. If a due date falls on a weekend or a legal holiday, it moves to the next business day.

When profit grows: which one pays more tax

As the business grows, the question most owners ask is which structure costs less. Neither one pays less in every case. The result depends on three things:

• how much profit the business makes
• whether it keeps the profit or pays it out
• the state

Each structure handles profit its own way:

• A default LLC pays no federal income tax itself. Its owners pay income tax plus self-employment tax on the profit.
• A C corporation pays 21% on its profit. Profit paid out as dividends is taxed again.
• An S corporation generally pays no federal tax itself. Its owners pay income tax on their shares, and their wages carry payroll tax.

You may hear the question of how much tax an S corp earning $200,000 pays. There's no single figure. The answer depends on several things:

• the owner's salary
• other income
• filing status
• the state

Two thresholds are fixed. The Social Security part of payroll or self-employment tax stops at $184,500 of earnings in 2026. The 0.9% Additional Medicare Tax starts above $200,000 for a single filer. The IRS doesn't publish a fixed "reasonable salary." So any exact savings figure needs the company's own books behind it.

Default LLC or an S election for a small owner

For a small owner, that comparison often turns into one practical choice. At some point your accountant asks whether you want to elect S status.

A default LLC is often enough in these cases:

• Profit is modest.
• Clean, low-effort bookkeeping matters more than a possible tax saving.
• The owner doesn't want to run payroll.

It's also the only option of the two if the company has owners an S corp can't have:

• a nonresident alien
• a partnership
• a corporation

An S election is worth considering when the business is steady and profitable. You also have to be ready to do these every year:

• run payroll
• pay a reasonable salary
• file Form 1120-S

And the S corporation comes with limits you should know before electing:

• no more than 100 shareholders, though a spouse and family members may count as one
• shareholders limited to individuals, estates, certain trusts and certain exempt organizations, so partnerships, corporations and nonresident aliens can't hold shares
• one class of stock only, though differences in voting rights alone don't create a second class
• payroll, withholding and an extra business tax return
• state taxes, which still apply

California is one example. It taxes S corporations at 1.5% of California-source income, with an $800 minimum franchise tax. The minimum is waived on the first return of a newly formed S corp. But first-year income is still taxed at 1.5%.

When a claim lands: how far the protection goes

Tax is only half the picture. The other half matters on the day a client or supplier makes a claim against the company.

Both an LLC and a corporation separate the owners' personal assets from the company's debts. Neither gives absolute protection. A court can "pierce the veil" and hold owners personally liable. And owners always remain responsible for their own wrongdoing.

This applies to both structures. An LLC doesn't offer weaker protection just because it has fewer formalities.

Every year after: what the state charges

Keeping either company in good standing also costs money every year. You'll meet these bills long after the formation fee is forgotten.

Both LLCs and corporations need a registered agent. Many states charge annual report fees or franchise taxes on both. The amounts differ a lot by state and entity type, as these two states show.

California's LLC fee depends on California income:

1. $900 for $250,000 to $499,999
2. $2,500 for $500,000 to $999,999
3. $6,000 for $1,000,000 to $4,999,999
4. $11,790 for $5,000,000 or more

In Delaware, the late filing penalty and interest apply to both LLCs and corporations.

Corporations also keep more records. The SBA notes that they cost more to form and need more record-keeping than LLCs.

Why investors prefer a corporation over an LLC

If you plan to bring in outside investors, this point can outweigh the whole tax comparison. Stripe runs a company formation service for startups. It writes that venture investors generally prefer corporations, and that corporations suit stock options better.

A corporation can issue several classes of stock. An LLC's ownership is harder to use this way. An S corporation doesn't solve the problem, because one class of stock and a 100-shareholder cap don't fit a typical investment round.

Stripe also notes that converting an LLC into a corporation later can be complicated and costly. So founders with a real investor plan usually consider a C corporation from the start.

If you live outside the US

If you're forming from abroad, the choice is narrower. S corporation status isn't available, because nonresident aliens can't be S corp shareholders. A single nonresident alien shareholder makes the election impossible.

An LLC is available, since its members can include foreign individuals and foreign entities. A single foreign owner's LLC is a disregarded entity for tax by default. A C corporation is also available and pays the 21% corporate tax like any other. In our work, most non-residents choose an LLC because it's simpler. They move to a corporation later as revenue grows.

Foreign-owned companies have one filing that's easy to miss: Form 5472. It applies to two kinds of company:

• a US corporation that's at least 25% foreign-owned
• a foreign-owned US disregarded entity, which files it with a pro forma Form 1120

The penalty for not filing is $25,000 per failure. If the form is still missing 90 days after an IRS notice, another $25,000 applies for each 30-day period. The details are in Form 5472 for Foreign-Owned US LLCs: Who Must File, Due Date and Penalties.

The wider picture of owning a US company from abroad is covered in Can a Non-US Resident Own a US LLC? What It Involves.

If you have a partner: where a partnership fits

If you're starting with a partner, you'll see a third option next to the LLC and the corporation, the partnership.

In this search, "partnership" usually means one of two things. It can mean a tax status. A US LLC with two or more members is taxed as a partnership by default and files Form 1065. So a multi-member LLC and a partnership often describe the same company.

It can also mean a separate business form that's neither an LLC nor a corporation. That falls outside this comparison. Sole proprietorships and DBAs are covered in Choosing a Business Structure: LLC, Corporation and DBA.

The mistakes we see owners make

Most of the expensive mistakes here are on the tax side, not in the state filing. The common ones are:

• Treating an S corp as a type of company. It's a tax election, and an LLC can make it without forming a corporation.
• Missing the Form 2553 deadline of 2 months and 15 days after the start of the tax year. Late relief exists, but it adds work.
• Paying no salary in an S corp. Owners who work in the business must take reasonable wages.
• Electing S status with a foreign owner. Nonresident aliens can't be shareholders, so the election fails.
• Forgetting Form 5472. A foreign-owned single-member LLC files it even though it's a disregarded entity. The penalty starts at $25,000.
• Choosing a C corporation with no investors in view. You get two levels of tax on paid-out profit and more record-keeping.
• Relying on outdated guides. Some still say every LLC must file a BOI report or the QBI deduction ends after 2025.
• Believing California LLCs skip the $800 tax in the first year. That exemption has ended.

Doing it yourself or getting help

Those mistakes are also the main reason to think about who handles what. The state filing itself is rarely the hard part. The forms are short, and many owners of a single-member LLC file on their own.

The harder decisions surround the filing:

1. the state
2. the tax status
3. whether an S election pays off this year or next
4. which yearly state and federal filings apply
5. who acts as registered agent
6. whether the operating agreement or bylaws match how the company really runs

Mistakes in those decisions cost far more than any filing fee. A missed Form 5472 alone carries a $25,000 penalty.

Filing yourself saves service fees and works for straightforward cases. A formation service saves time and lowers the chance of missing a state or IRS requirement. Some questions belong with an accountant or a business lawyer:

1. tax status
2. reasonable salary
3. investor plans

They can check the current IRS and state figures against your own numbers.

Formation is the part our team does for new companies, often for owners outside the US. The tax status and salary questions stay with your accountant.

What to do before you tick the box

Start with your own plans: whether you'll raise investor money and whether anyone outside the US will own part of the company. Those two answers rule out some options right away.

Then look at the yearly cost in the state you're considering. If an S election looks attractive, have an accountant check it against your real profit first. That election is covered in more detail in LLC vs S Corp.