When starting a business in the United States, one of the most important decisions you’ll face is whether to form a Limited Liability Company (LLC) or a Corporation (Inc.). Both structures provide liability protection, separate legal identity, and access to growth opportunities. However, they differ in how they’re taxed, managed, and maintained. This guide will help you understand the key differences between an LLC and a Corporation in 2025 so you can choose the best structure for your business.
Legal Structure and Formation
An LLC is a flexible business entity that combines the liability protection of a corporation with the simplicity of a sole proprietorship or partnership. It’s created by filing Articles of Organization with the Secretary of State. Owners are called “members” and may manage the company themselves or appoint managers.
A Corporation is a more rigid legal structure formed by filing Articles of Incorporation. Owners are called “shareholders”, and the company is managed by a board of directors and corporate officers. Corporations must follow strict governance rules, hold annual meetings, and keep corporate minutes.
You can find your state’s formation requirements through this official source:
🔗 NASS – Business Formation Search
Taxation
LLCs are pass-through entities by default. This means business income is passed to the members and taxed on their individual tax returns. Single-member LLCs file Schedule C with Form 1040, while multi-member LLCs file Form 1065 and issue Schedule K-1 to each member. LLCs can also elect to be taxed as an S Corporation or C Corporation for potential tax savings.
Corporations are separate tax entities by default. A C Corporation files Form 1120 and pays corporate income tax (currently 21% federally). If profits are distributed as dividends, shareholders also pay tax—this is called double taxation. Alternatively, a Corporation can elect S-Corp status to become a pass-through entity, avoiding corporate tax. However, there are restrictions on S-Corp eligibility (e.g., number and type of shareholders).
More information on tax classifications can be found here:
🔗 IRS – LLC and Corporation Tax Info
Ownership and Management
An LLC allows unlimited members (including foreign individuals or entities) and has flexible management. It can be member-managed or manager-managed. This allows small business owners to maintain control without a board of directors.
A Corporation is managed by a board of directors, with decisions executed by appointed officers (CEO, CFO, etc.). Ownership is split into shares of stock, which can be sold to raise capital. C-Corps can issue different classes of shares and go public, while S-Corps are limited to 100 shareholders who must be U.S. persons.
If you plan to attract outside investors or eventually go public, a Corporation may be better suited.
Compliance and Paperwork
LLCs have minimal ongoing compliance requirements. Most states require an annual report and filing fee. There’s no need to hold formal meetings or maintain detailed corporate records (though it’s still good practice).
Corporations face more formalities. They must:
- Hold annual shareholder and board meetings
- Keep meeting minutes
- Adopt bylaws
- Issue stock certificates
- Maintain a formal record of ownership
Failing to comply can lead to loss of liability protection.
Cost
The cost to form and maintain both LLCs and Corporations varies by state. Generally:
- LLCs are cheaper to maintain with fewer fees
- Corporations may cost more due to additional compliance and legal assistance
You’ll also need a registered agent and may pay franchise taxes depending on the state.
Each state’s annual requirements and fees can be verified here:
🔗 IRS – State Government Resources
Credibility and Funding
Corporations are often seen as more professional and investor-friendly. Venture capitalists and angel investors usually prefer investing in C-Corps, especially those based in Delaware. Corporations can also offer employee stock options.
LLCs, while flexible, are less ideal for raising capital. They’re perfect for small businesses, freelancers, consultants, and family-owned enterprises that don’t plan to take on outside investors.
Which One Should You Choose?
Choose an LLC if:
- You want flexibility and ease of management
- You prefer pass-through taxation
- You’re starting a small to mid-sized business
- You’re not planning to raise venture capital soon
Choose a Corporation if:
- You plan to raise investment or issue shares
- You want to go public in the future
- You prefer structured management with a board
- You need stock-based compensation plans
There is no universal answer. The right choice depends on your business model, growth plans, tax situation, and need for simplicity vs. structure. It’s recommended to consult with a business attorney or CPA to assess which structure fits your goals for 2025 and beyond.