Starting a business comes with a lot of exciting decisions, and choosing between an LLC and a corporation (Inc.) might be one of the most important. Both offer liability protection and help build credibility, but they operate in different ways when it comes to taxes, ownership, and flexibility.
Think of your business structure as the blueprint for how your company runs and grows. The right choice can make everything from daily operations to long-term planning smoother. Let’s compare corporations and LLCs so you can decide which structure best fits your goals.
Key takeaways: Inc. vs LLC at a glance
Here’s a quick, side-by-side comparison of LLCs and corporations.
| Category | Limited Liability Company (LLC) | Corporation (Inc.) |
|---|---|---|
| Ownership | Owned by one or more individuals called members and/or managers | Owned by shareholders who hold stock in the company |
| Management | Flexible structure; members can manage directly or appoint managers | Formal structure with a board of directors, officers, and shareholders |
| Liability Protection | Separates personal assets from business debts and lawsuits | Protects personal assets; liability is limited to what’s invested |
| Taxes | Pass-through taxation by default (profits taxed on personal returns); can choose to be taxed as a corporation; LLC taxation laws may vary by state | Double taxation (corporate profits taxed, then dividends taxed again), unless it qualifies as an S corp |
| Paperwork and Compliance | Simple setup with fewer annual requirements and less recordkeeping | Requires more formalities like annual meetings, bylaws, and detailed records |
| Flexibility | Highly adaptable | More rigid structure |
| Profit Distribution | Profits can be divided any way members choose | Profits are distributed based on stock ownership |
| Setup Cost | Typically faster and more affordable to form | Often have higher startup costs due to added paperwork, legal requirements, and state filing fees |
| Capital Opportunities | More limited; funding usually comes from members or loans | Easier to raise money through selling stock or attracting investors |
| Best For | Small businesses, solo entrepreneurs, or startups wanting flexibility | Growing businesses looking to attract investors or go public one day |
What is an LLC?
A Limited Liability Company (LLC) is a business structure that legally separates your personal assets from your business, offering protection if your company faces debt or legal issues. It combines the limited liability of a corporation with the simplicity and flexibility of a sole proprietorship or partnership.
An LLC can be owned by one or more members, who can be individuals or other entities. Members have control over how the business operates and how profits are distributed, without the formal requirements of a board of directors or shareholders. This makes LLCs especially appealing for small business owners who want to keep operations straightforward while still gaining legal protection.
From a tax standpoint, LLCs are known for their flexibility. Most are taxed as “pass-through” entities, meaning profits and losses flow directly to the members’ personal tax returns. However, business owners can also choose to have their LLC taxed as a corporation if it makes financial sense.
To learn more about how this structure works, check out what is an LLC, explore different LLC types that might fit your business needs, and compare LLP vs. LLC or sole proprietorship vs. LLC. If you decide it’s the right choice for your business, set up an LLC now with GoDaddy.
What is a corporation (Inc.)?
A corporation is a legal business structure that creates a separate entity from its owners, providing strong liability protection and a formal management framework. This separation means the business—not its owners—is responsible for its debts, obligations, and legal matters.
Corporations often include the abbreviation Inc. (short for incorporated) in their names to show that the business has gone through a legal process to become its own independent organization. Once incorporated, the business can issue stock, bring in shareholders, and operate under a more structured system with a board of directors and officers overseeing major decisions.
Corporations tend to follow more regulations and reporting requirements than LLCs, but they also offer benefits like easier access to funding, greater credibility, and a clearer path to expansion. Many businesses choose to incorporate to attract investors, build trust with clients, or prepare for long-term growth.
Not sure if a corporation is right for you? Read this guide to other business types.
Types of corporations
The term “corporation” covers several different business structures, each designed for specific goals and growth plans. While all corporations provide liability protection and a formal management structure, they differ in how they’re taxed, owned, and operated.
- C Corporation (C Corp): The most common type of corporation. C Corps are separate legal entities that can have unlimited shareholders, issue stock, and raise money from investors. However, they’re subject to double taxation, meaning corporate profits are taxed, and shareholders pay taxes on dividends.
- S Corporation (S Corp): Designed for small to mid-sized businesses, S Corps avoid double taxation by passing income and losses directly to shareholders. They must meet specific IRS requirements, such as limiting the number and type of shareholders.
- Nonprofit Corporation: Created for charitable, educational, or religious purposes. Nonprofits can apply for tax-exempt status and must reinvest any surplus funds into their mission rather than distributing profits.
- Professional Corporation (PC): Reserved for licensed professionals like doctors, lawyers, or accountants. PCs offer liability protection while allowing professionals to maintain ownership and control within their field.
- Other Types: Some states recognize additional forms, such as close corporations or benefit corporations (B Corps), which blend profit-making with social responsibility.
No matter which type of corporation you choose, you are required to have a registered agent in every state you operate to receive official legal and tax documents on the company’s behalf.
Core differences between LLCs and corporations
Choosing between an LLC and a corporation comes down to how you want your business to run, grow, and get taxed. Let’s delve into the key differences that usually make the decision clearer for most entrepreneurs.
Formation and registration
Setting up an LLC is usually quick, affordable, and simple. You’ll file Articles of Organization (the name of this filing varies by state), name a registered agent, and pay a small fee. It’s a straightforward process that lets you focus on getting your business off the ground fast. You can learn more about the costs to start an LLC here.
Forming a corporation takes more time and paperwork. You’ll need to file articles of incorporation, draft bylaws, issue stock, and hold initial board meetings. While it’s more complex and can be expensive, the structure sets your business up for growth and investment opportunities later on.
Management and ownership
LLCs are built for flexibility. Owners, called members, can manage the business themselves or appoint managers to handle day-to-day operations. Profits can be divided in whatever way members agree. If you’re unsure how ownership works, check out this guide on LLC organizer vs member.
Corporations follow a more formal setup with shareholders, directors, and officers. Ownership is divided into shares that can be transferred or sold, making it easier to bring in new investors or change ownership down the road.
Liability protection
Both LLCs and corporations are designed to protect your personal assets if your business faces debt or legal claims, but they do it in slightly different ways.
In an LLC, liability protection is tied directly to the company’s separation from its members. As long as you keep your business finances separate and follow your state’s filing rules, your personal property generally can’t be used to cover business obligations. However, this protection can weaken if you mix personal and business funds or personally guarantee a loan.
In a corporation, liability protection is built into its corporate structure. Shareholders’ risk is usually limited to the amount they’ve invested in the company. Even if the corporation is sued or goes into debt, shareholders aren’t personally responsible. Still, officers and directors must follow corporate formalities—such as maintaining records and acting in good faith—to maintain that protection.
Tax implications
In most states, LLCs are treated as pass-through entities by default. This means that the business itself doesn’t pay federal income taxes. Instead, profits and losses “pass through” to the owners, who report them on their personal tax returns. This setup helps avoid double taxation and keeps things simple during tax season. LLC owners can also take advantage of various tax deductions and credits that lower their taxable income. If it makes financial sense, an LLC can even elect to be taxed as a corporation. To learn more about what that looks like, explore this guide on filing business taxes for LLC.
A corporation, on the other hand, is taxed as a separate legal entity. That means it pays corporate income tax on profits before any earnings are distributed to shareholders. Those dividends are then taxed again on shareholders’ personal returns, resulting in what’s known as “double taxation.” Some small corporations may choose to become S Corps, which allows income to pass through to shareholders while maintaining corporate benefits.
Costs to form and maintain
LLCs are generally cheaper to form and maintain. Most states charge a modest filing fee and require an annual report (also accompanied by a fee) to stay in good standing. You’ll also likely need various business licenses and permits, depending on your location and industry.
Corporations tend to have higher startup and maintenance costs. You’ll likely pay more in filing fees and may need to cover expenses for annual meetings, franchise taxes, and recordkeeping. However, that added cost often comes with access to greater funding options and long-term growth potential.
Compliance and ongoing requirements
LLCs keep things simple. You’re not required to hold annual meetings or keep extensive records, but it’s smart to document major business decisions and keep your books clean to prevent disputes and protect your assets.
Corporations must follow more formal rules, such as holding shareholder meetings, maintaining corporate minutes, and filing regular reports with the state. This structure is designed to keep your business accountable as it grows and brings in investors.
Investor and fundraising potential
If your goal is to raise significant capital, a corporation is the clear choice. Corporations can issue stock and attract venture capital, which makes them appealing for startups planning to expand or go public.
LLCs, on the other hand, are better suited for smaller businesses or partnerships that prefer control and flexibility over outside investment. While they can still bring in funding through loans or new members, they don’t have the same investor appeal as corporations.
Pros and cons: LLC vs Inc.
Weighing the pros and cons of forming an LLC or corporation is one of the easiest ways to see which structure fits your business goals. Here’s where each structure excels and where it might not be the perfect fit.
LLC advantages
- Flexible structure: LLCs let owners decide how to manage the business and divide profits. You can run it yourself or bring on other members with clearly defined roles.
- Simple setup: It’s generally faster and easier to start an LLC than to form a corporation, with less paperwork and lower startup costs.
- Tax benefits: Pass-through taxation means profits are reported on your personal tax return, helping you avoid double taxation.
- Limited liability: Your personal assets are typically protected from business debts or lawsuits.
- Scalability: LLCs can adapt as your business grows, making them one of the best business entities for ecommerce or service-based startups.
LLC disadvantages
- Self-employment taxes: Members must pay self-employment tax on business income, which can add up.
- Limited growth potential: It can be harder for LLCs to attract investors or raise funds compared to corporations. You can explore an alternative capital option if you plan to expand.
- State rules vary: Each state has different filing, reporting, and renewal requirements, which can create extra steps for multi-state operations.
- Fewer formalities: While flexibility is a perk, the lack of structure can make it harder to manage growth or bring on partners.
Corporation advantages
- Strong credibility: The “Inc.” designation can make your business appear more established, helping you build trust with customers, lenders, and investors.
- Easier to raise money: Corporations can issue stock to attract investors or go public down the road.
- Liability protection: Shareholders’ personal assets are protected from corporate debts or lawsuits.
- Continuity: Corporations exist independently of their owners, meaning the business can continue even if ownership changes.
- Ownership transfer: Shares are easy to sell or transfer, making transitions smoother.
Corporation disadvantages
- Double taxation: Profits are taxed at both the corporate and shareholder levels unless the business elects S Corp status.
- More paperwork: Corporations must hold annual meetings, maintain records, and follow strict compliance rules.
- Higher costs: Filing fees, ongoing maintenance, and compliance expenses are usually higher than for LLCs.
- Less flexibility: Ownership and decision-making follow a formal hierarchy of shareholders, directors, and officers.
- Name protection takes effort: To legally protect your business, you’ll need to register your corporate name in every state where you operate.
How to choose between Inc. and LLC: Practical checklist
Not sure which business structure fits your goals? Use this checklist to think through how each option aligns with your growth plans, finances, and comfort level with formalities. Your answers can help point you toward the right choice for where your business is today and where you want it to go.
Do you plan to seek investors or raise capital?
If you see outside funding or venture capital in your future, a corporation might be the better fit. Corporations can issue stock and often appeal more to investors. If you plan to stay small or keep ownership in the family, an LLC offers more flexibility and control.
How much management structure do you want?
Corporations have a clear hierarchy with shareholders, directors, and officers. This works well if you prefer defined roles and long-term governance. LLCs are simpler and allow members to decide how they want to run things, making them ideal for entrepreneurs who value flexibility.
What are your tax preferences?
LLCs typically use pass-through taxation, meaning profits flow directly to the owners’ personal tax returns. This setup simplifies tax filing and avoids double taxation. Corporations pay taxes on profits separately, but S Corps can provide a middle ground by allowing income to pass through to shareholders.
How comfortable are you with compliance and paperwork?
If you prefer fewer formalities, an LLC is easier to maintain. You won’t need to hold annual meetings or keep detailed minutes. Corporations have more ongoing requirements, but that structure can also add professionalism and credibility with lenders and partners.
What are your long-term goals?
Think about where you want your business to be in five or ten years. LLCs work well for smaller, privately owned companies that want flexibility. Corporations are better for businesses planning to scale, sell shares, or go public.
Unique considerations for startups, freelancers, and small businesses
Not every business fits neatly into one structure. Startups, freelancers, and small business owners each have unique needs, growth goals, and financial situations. Choosing between an LLC and a corporation depends on how you plan to operate, scale, and manage your brand in the long run.
If you’re a new business owner, read this article on how to start a business. When you’re ready to bring your idea to life, get a creative business name with our Free Business Name Generator and start building your brand today.
Startups
For startups, investor interest is often the deciding factor. Many venture capital firms and angel investors prefer to work with corporations because they can issue stock and have a formal governance structure. If your startup plans to seek funding or go public, incorporating early can help build trust and streamline the investment process. On the other hand, if you’re testing an idea or bootstrapping your launch, forming an LLC keeps costs low and operations flexible while you refine your business model.
Freelancers
Freelancers and remote professionals often choose LLCs because they offer liability protection without the added paperwork of a corporation. An LLC also helps separate personal and business income, which simplifies taxes and presents a more professional image to clients.
Small businesses
For small businesses, think about long-term stability and credibility. Corporations can make it easier to bring on partners or investors, while LLCs are ideal for family-owned or locally operated companies that value simplicity. If this is your first small business, check out these small business ideas and download this free business plan template to map out your goals and projections before you register your business.
Transitioning between an LLC and a corporation
As your business grows, its original structure might no longer fit your goals. Many entrepreneurs start as an LLC for the simplicity and flexibility, then later convert to a corporation to attract investors or expand. Others may decide to move from a corporation to an LLC to simplify operations or reduce administrative costs.
Transitioning from one structure to another involves updating legal documents and filing the appropriate paperwork with your state. The process can vary depending on where your business is registered, but it often includes submitting conversion forms, updating your tax classification, and notifying the IRS. It’s also important to amend your operating agreement or bylaws to reflect the new setup.
While it’s possible to make the change yourself, working with a business attorney or accountant can help you avoid mistakes that might affect your liability protection or tax obligations. If you’re unsure whether it’s time to change your structure, review this guide on when to incorporate your business for more insight into how timing and growth goals affect your next steps.
FAQs about subscription-based business models
Which is more straightforward to set up: an LLC or a corporation?
An LLC is generally easier and faster to set up than a corporation. Most states require fewer forms, lower filing fees, and simpler documentation for LLCs. You can typically complete the process online through your state’s business portal and start operating once you receive approval.
Which is easier to manage: an LLC or a corporation?
LLCs are easier to manage because they have fewer formal requirements. You are not required to hold annual meetings, record minutes, or maintain a board of directors. Corporations, on the other hand, must follow stricter rules to stay compliant, which can add to administrative work.
What is the difference between a C Corp and an S Corp?
The main difference lies in how they are taxed. A C Corp pays taxes on its profits, and shareholders pay taxes again on dividends, creating double taxation. An S Corp allows profits and losses to pass through to shareholders’ personal tax returns, avoiding double taxation, but it must meet specific IRS requirements.
Can I convert my LLC into a corporation, and how does the process work?
Yes, you can convert your LLC into a corporation by filing a conversion or incorporation form with your state. The process usually includes drafting new corporate bylaws, issuing stock, and updating your tax classification with the IRS. Many businesses also consult an attorney or accountant to ensure the transition meets state and federal regulations.
What motivates businesses to switch from a corporation to an LLC?
Some businesses convert to an LLC to simplify operations, reduce paperwork, and lower ongoing compliance costs. LLCs offer flexible management options and pass-through taxation, which can make financial reporting easier. Companies that no longer need investors or stockholders often find the LLC structure better suited to their goals.
Is an LLC or incorporation the smarter choice for my small business?
The smarter choice depends on your business goals, size, and growth plans. LLCs are ideal for small businesses that want flexibility, simple taxes, and limited paperwork. Incorporation makes more sense if you plan to raise capital, issue stock, or expand on a larger scale.
