LLC vs. Corporation: Which Is Right for a Small Business?
The entity you choose affects your personal liability, your taxes and how easily you can bring in partners or investors. Here's how the common choices compare.
Sole proprietorship and partnership: the default
If you start doing business without forming an entity, you're a sole proprietor (or a general partnership with a partner). It's simple and cheap, but you're personally liable for the business's debts and lawsuits.
Limited liability company (LLC)
- Liability: owners ("members") are generally protected from the business's debts and claims.
- Taxes: by default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership. Profits "pass through" to the owners' personal returns. An LLC can also elect to be taxed as an S or C corporation.
- Formalities: lighter than a corporation. An operating agreement is strongly recommended, especially with more than one owner.
- Best for: most small businesses, real estate holdings and professional practices where allowed.
S corporation
An S corp is a tax election, not a separate type of company. A corporation or an LLC can elect it. Owners who work in the business pay themselves a reasonable salary and may take remaining profit as distributions, which can reduce self-employment taxes. Limits apply: generally no more than 100 shareholders, only certain kinds of shareholders, and one class of stock.
C corporation
- Taxes: the corporation pays tax on its profits, and shareholders pay tax again on dividends ("double taxation").
- Formalities: bylaws, a board of directors, annual meetings and minutes.
- Best for: businesses planning to raise venture capital or issue different classes of stock, or that may go public. Investors generally expect a C corporation.
Keeping your liability protection
Forming an entity isn't enough. Keep business and personal money separate, sign contracts in the company's name, keep it in good standing with annual reports and fees, and keep adequate insurance. Mixing funds can let a court "pierce the veil" and reach your personal assets.
Where a business attorney helps
Online formation is cheap and fine for simple cases. A lawyer is worth it for multi-owner businesses (the operating or shareholder agreement is where disputes are won or lost), raising money, buying or selling a business, licensed professions, and contracts and leases. Talk to an accountant about the tax election.
Find a business attorney near you. Related: trademark vs. copyright vs. patent.
This guide is general information, not legal or tax advice. Entity rules and fees vary by state.