The short version
An LLC and a corporation both are companies separate from their owners, so in both the business's debts are generally its own. A corporation is owned through shares of stock and run by a board of directors and officers under formal rules. An LLC is owned through membership interests and run however its operating agreement says. By default the IRS taxes a corporation's profit twice and an LLC's once. For how a corporation is owned, run and formed on its own terms, see what is a corporation on our sister site.
Side by side
| LLC | Corporation | |
|---|---|---|
| Created by filing | Articles of organization (a certificate of formation or of organization in some states) | Articles of incorporation (a certificate of incorporation in some states) |
| Owners | Members | Shareholders |
| Ownership | Membership interests, as the operating agreement sets them | Shares of stock |
| Run by | The members, or managers they appoint | A board of directors, which appoints officers |
| Rulebook | Operating agreement | Bylaws, plus the board's and shareholders' resolutions |
| Default federal tax | Passes through: taxed as a sole proprietorship or partnership | A C corporation: taxed on its profit, then shareholders taxed on dividends |
| Can elect S corporation status | Yes, if it qualifies | Yes, if it qualifies |
| Bringing in investors | Possible, through the operating agreement | Built for it: shares, classes of stock, options |
Taxed once or twice
The IRS recognizes a C corporation as a separate taxpayer. It pays tax on its profit when it earns it, at a flat federal rate of 21%, and its shareholders pay tax again when that profit reaches them as dividends; the corporation gets no deduction for the dividends it pays. That's the double tax.
An LLC's profit, by default, isn't taxed at the company level at all. It passes through to the members' own returns, where it's taxed once, and members who work in the business also pay self-employment tax on it. Either kind of company can elect S corporation status to pass profit through without the corporate tax; an LLC can also elect to be taxed as a C corporation. See LLC vs S corp.
Double taxation isn't always worse: profit a corporation keeps to grow the business pays only the 21% corporate tax until it's distributed, which can be less than the owners' personal rates.
Formalities
State corporation laws expect a corporation to adopt bylaws, elect directors, hold shareholders' and directors' meetings, and keep minutes and a stock ledger. An LLC's law asks much less: the members agree how the LLC is run, and many single-member LLCs never hold a formal meeting. Fewer formalities mean fewer ways to slip, though an LLC still needs its own bank account and records to keep its liability shield.
Which fits
An LLC usually fits a business with one or a few owners who work in it, who want profit taxed once on their own returns and the freedom to set their own rules about management and profit sharing.
A corporation usually fits a business that will sell shares to outside investors, grant stock options to employees, or keep most of its profit in the company to reinvest.
Both are formed by a filing with the state. Each state's guide to starting an LLC covers the LLC's form and fee, and our sister site has corporate bylaws for a corporation.
Sources
- Corporations, IRS
- Limited liability company (LLC), IRS
- S corporations, IRS
- 26 U.S.C. 11, tax imposed on corporations (US Code)
Common questions
Which is better for a small business, an LLC or a corporation?
For most small businesses with a few owners, an LLC: it's simpler to run and its profit passes through to the owners' returns by default. A corporation suits a business that will sell shares to investors or keep most of its profit in the company.
Do corporations pay more tax than LLCs?
A C corporation pays a flat 21% federal tax on its profit, and shareholders pay tax again on the dividends they receive. An LLC's profit is taxed once, on the owners' returns, unless it elects to be taxed as a corporation.
What's the difference between Inc. and LLC?
Inc. stands for incorporated: the business is a corporation, owned by shareholders and run by a board of directors. LLC stands for limited liability company, owned by members under an operating agreement.
Can an LLC be taxed like a corporation?
Yes. An LLC can elect to be taxed as a C corporation by filing Form 8832, or as an S corporation by filing Form 2553 if it qualifies, while staying an LLC under state law.