LLC vs Inc: depends on how you plan to raise.
A side-by-side comparison of structure, tax treatment, liability protection, cost, and use cases. The decision usually comes down to a few specific factors; this guide walks through each.
Most operating businesses form an LLC. Venture-backed startups form a Delaware C-Corp. The dividing line is whether you plan to raise institutional money or grant traditional stock options. If you might, form a Corporation from the start; converting later is more expensive than starting right.
Which fits your situation.
- You are a solo operator or small partnership
- Pass-through taxation works for your situation
- You do not plan to raise venture capital
- You want minimal corporate formalities
- You hold real estate or single-property assets
- You will only ever have a small number of owners
- You plan to raise venture capital (institutional investors require C-Corp)
- You want to issue stock options to employees (ISOs)
- You want QSBS eligibility (Section 1202 capital gains exclusion)
- You expect significant retained earnings (C-Corp taxed at 21%, lower than top personal rate)
- You may eventually IPO
- You want clear separation between operators and shareholders
Every factor that matters.
| Factor | LLC | Corporation (Inc) |
|---|---|---|
| Owners | Members | Shareholders |
| Governance | Operating Agreement | Bylaws + Articles of Incorporation |
| Management | Member-managed or manager-managed; flexible | Board of Directors + Officers; formal structure required |
| Tax treatment (default) | Pass-through to members | C-Corp: double taxation (corp + dividend tax). S-Corp election available for eligible Corps |
| Self-employment tax | Active members pay 15.3% on profits | Owner-employees pay payroll tax on wages, not on dividends or distributions |
| Stock / equity | Membership interests; can have classes | Stock; common and preferred; multiple classes possible |
| Employee equity | Profit interests, phantom equity; less standard | ISOs and NSOs; standard, well-understood by employees |
| VC funding | Difficult; VCs prefer C-Corps | Standard; C-Corp is the expected structure |
| IPO eligibility | Must convert to C-Corp first | Direct |
| QSBS (Section 1202 capital gains exclusion) | Not eligible | Eligible if C-Corp and meets requirements |
| Foreign ownership | Yes, no restrictions | C-Corp: yes. S-Corp: no, only US individuals |
| Annual filings | State annual report; tax pass-through | State annual report; corporate income tax return; potentially S-Corp return |
| Cost to form | State fee only ($35-$520) | State fee only ($35-$725 depending on Corp variant) |
| Cost to maintain | Annual report fee; sometimes franchise tax | Annual report fee; franchise tax; potentially Delaware franchise tax |
| Recommended use | Most operating businesses | Venture-backed startups, future public companies |
How each is taxed.
By default, LLCs are pass-through entities. The LLC itself does not pay federal income tax. Income flows to the members' personal returns via Schedule K-1 (multi-member) or Schedule C (single-member). Members pay tax at their individual rates.
By default, C-Corps are subject to double taxation. The Corporation pays 21% federal corporate income tax on profits. When profits are distributed as dividends, shareholders pay dividend tax (15-23.8% federal, plus state). Total combined rate can exceed 40%.
S-Corp election (Form 2553) is available to both LLCs and Corporations that meet eligibility. S-Corp avoids double taxation; income flows through to owners' personal returns. Restrictions: 100 shareholders max, US individuals only, single class of stock.
For most operating businesses, LLC pass-through is more tax-efficient. For venture-backed startups, the C-Corp double taxation is offset by QSBS (Section 1202): up to $10M (or 10x basis) of capital gains exclusion on qualifying C-Corp stock held more than 5 years. This is the single largest tax-planning argument for C-Corp over LLC in startup formation.
What each costs.
State filing fees for LLCs range from $35 (Montana) to $520 (Massachusetts). State filing fees for Corporations are similar in some states, much higher in others (Nevada $725 includes initial list + business license). Our service fee is $0 for either.
Ongoing costs differ. LLCs typically pay an annual report fee ($25 to $300 by state) and may have franchise tax depending on the state. C-Corps file federal corporate income tax annually (Form 1120, separate from the owner's personal return), state corporate income tax, and Delaware franchise tax if incorporated in Delaware ($175 to $200,000+ depending on share structure).
Delaware franchise tax for typical 10M-share startup C-Corps using the Authorized Shares Method is ~$170-$450 first year. Most startups use the Assumed Par Value Method, which can be much cheaper for early-stage companies.
Protection differences.
Both LLCs and Corporations provide a liability shield. Owners are not personally liable for business debts or lawsuits in either structure, as long as the entity is maintained properly (separate accounts, no commingling, follow governance formalities, file annual reports).
The Corporation has more formality requirements: annual shareholder meetings, board meetings, meeting minutes, formal resolutions for major decisions. Missing these can be evidence of "veil piercing" if a creditor challenges the corporate shield in court.
The LLC has fewer required formalities. An Operating Agreement that is followed and a separate bank account are usually enough to maintain the shield.
In practice, both structures provide effective liability protection. The Corporation is slightly more robust in court because of the longer case-law history and clearer formality expectations.
The File.Business Promise
If we miss a filing deadline on a service you pay us to manage, we pay the state penalty. If you change your mind in the first 60 days, we refund our service fee in full.
Common questions.
Which is cheaper, LLC or Inc?
Can I convert an LLC to a Corporation later?
Why do VCs require C-Corp structure?
What is QSBS and is it important?
Should I incorporate in Delaware if I am operating elsewhere?
Can a Corporation be a single owner?
What is the difference between C-Corp and S-Corp?
Do I need a Delaware C-Corp to raise money?
Can I be the sole shareholder and director of my Corporation?
What is a closely-held Corporation?
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