LLC vs Inc.: Everything You Need to Know
Choosing a business structure is like picking the right tool for a job—each has its strengths, quirks, and costs. For new entrepreneurs, the Limited Liability Company (LLC) and Corporation (Inc.) are two of the most popular options in the U.S. Both protect your personal assets, but they differ in taxes, management, ownership, and paperwork. This guide breaks it all down in plain English and a clear comparison table, so you can choose the structure that fits your business dreams. Let’s get started! Table of Contents What is an LLC? A Limited Liability Company (LLC) is like bubble-wrap for your personal assets: it shields them from business debts and lawsuits while remaining simple to run. LLC owners, called members, enjoy liability protection with fewer formalities than a corporation. To form an LLC, you file Articles of Organization with your state’s Secretary of State and pay a fee—usually between $50 and $500 (e.g., $50 in Colorado; $500 in Massachusetts). While an Operating Agreement isn’t required in every state, it’s a smart way to spell out ownership, profit splits, and decision-making rules. Fun Fact: LLCs existed in limited form starting in the late 1970s, but their popularity has exploded since the mid-1990s. In recent years, LLCs have become the most common structure chosen by small-business owners, reflecting their appeal to modern entrepreneurs. What is an Inc. (Corporation)? A corporation is a separate legal person with shareholders, a board, and more built-in formality. You file Articles of Incorporation (fees range from $90 in Delaware to $125 in New York), adopt bylaws, and hold annual shareholder and board meetings. Corporations come in two tax flavors: Fun Fact: Although corporations account for roughly 8% of all business tax returns, they generate about 60% of total U.S. business receipts, underscoring how most revenue still flows through corporate entities. Key Differences at a Glance Below we compare five critical areas: liability protection, taxation, management, ownership, and compliance. Comparison Table: LLC vs. Inc. Factor LLC Inc. (C Corp) Inc. (S Corp) Liability Members protected unless they commit fraud/negligence. Courts pierce veil very rarely. Shareholders protected. Veil-piercing more common than with LLCs. Same as C Corp. Taxation Pass-through (Schedule C/K-1); can elect C/S Corp status; Members pay self-employment tax on profits by default. Double taxation: 21% corporate tax + dividend tax (0%–20%). Pass-through; no self-employment tax on distributions; strict limits. Management Flexible: member-managed or manager-managed; no board or meetings required. Formal: board + officers; annual meetings and minutes mandatory. Same as C Corp. Ownership Unlimited members; no stock; transfers need approval. Unlimited shareholders; stock easy to sell; ideal for VC. Max 100 U.S. shareholders; one stock class. Compliance Minimal: annual report (fees $0–$500) and basic bookkeeping. High: adopt bylaws, hold annual meetings and minutes; several thousand dollars per year. High: same formalities as C Corp plus S-Corp eligibility upkeep; several thousand dollars per year. Best For Small businesses, freelancers, hands-on owners. Scalable startups, VC-funded ventures, public companies. Small firms wanting pass-through taxation with corporate structure. 1. Liability Shield Both LLCs and corporations protect personal assets, but the strength of that shield depends on following the rules. 2. Taxes Below is a condensed overview of how each structure is taxed, focusing on key points a newcomer needs to know. LLC (Default Pass-Through): LLC Electing S-Corp Status (Optional): C-Corp (Traditional Corporation): S-Corp (Standalone Election): Taxation Summary Table: Structure Entity Tax Rate Owner Tax Treatment Self-Employment Tax on Profits? Key Notes LLC (Default) 0% (pass-through) Owner reports on Schedule C or K-1 → Form 1040 Yes, 15.3% on net earnings Single-member uses Schedule C; multi-member files 1065 → K-1. QBI deduction up to 20%. LLC → S-Corp 0% (pass-through) Owner takes reasonable salary (W-2); rest is dividends Only on salary (FICA) Savings vs. 15.3% if distributions > salary; requires payroll setup. LLC → C-Corp 21% Profits taxed at 21% → dividends taxed again (0%–20%) — Potential double taxation; can retain earnings; access to corporate credits. C-Corp (Standalone) 21% Dividends taxed at 0%–20% on shareholders — Traditional corporate structure; double taxation. S-Corp (Standalone) 0% (pass-through) Owner salary (W-2) + distributions via K-1 Only on salary (FICA) Must meet eligibility (≤ 100 U.S. shareholders, one stock class). 3. Management Style 4. Ownership Flexibility 5. Compliance & Cost LLC C Corp S Corp Pros and Cons of LLC vs. Inc. LLC Pros LLC Cons Inc. Pros Inc. Cons Which Should You Choose? The choice between an LLC and Inc. depends on your business goals, size, and growth plans: Need Help Deciding? At Fynlo, we understand that choosing the right business structure can feel overwhelming. Our accounting software and expert team are here to simplify the process, from formation to tax planning. Whether you’re leaning toward an LLC or a corporation, we can help you navigate the paperwork, optimize your taxes, and stay compliant. Ready to get started? Schedule a call with Fynlo today to discuss your business goals and find the perfect structure for your success. Let’s build your dream business together! You may also like these articles:
Tax Filing Guide for S Corp, C Corp and LLC
Picking the right business structure is a big deal, and taxes are a huge part of that decision. In this article, we’re breaking down the tax filing side of things for C Corps, S Corps, and LLCs, so freelancers and business owners can get a handle on the forms and deadlines for each. If you’re looking for a broader comparison, Choosing the Best Business Structure for Freelancers is a solid starting point! The article was last updated as of 4 March 2025. Keep in mind that tax rules and limits can change, so be sure to watch out for updates or consult a tax professional for the latest information. Table of Contents Brief Highlights: Comparing C Corp, S Corp and LLC Here’s a quick rundown of the three business structures to give you the big picture. In the next sections, we’ll break down the details of tax treatment and the specific forms you’ll need to know. It’ll all come together as we go. Category S Corporation (S Corp) C Corporation (C Corp) Limited Liability Company (LLC) Tax Forms – Form 1120-S– Shareholders file Schedule K-1 on personal returns – Form 1120 – Shareholders report dividends on personal returns Depends on tax classification. See LLC section. Filing Deadlines March 15 2025*; extensions available April 15 2025*; extensions available Depends on tax classification. See LLC section. State Taxes Varies; some states do not recognize S Corp status Subject to state corporate income taxes Subject to state taxes depending on classification Eligibility Requirements – Must be a domestic business– Up to 100 shareholders – Individuals only – No limit on shareholders– Can include foreign and corporate owners – No ownership restrictions – Flexible member structure Ownership Restrictions – Max 100 shareholders– One class of stock– U.S. citizens/residents only – Unlimited shareholders– Can issue multiple stock classes – No restrictions– Members can be individuals, corporations, or foreign entities Compliance Requirements – Annual meetings– Shareholder voting– File annual reports – Annual meetings– Corporate governance– Strict record-keeping – Varies by state– Fewer formalities than corporations Average Formation Costs# ~$1,200 ~$633 ~$50-$500 depending on state Fundraising Ability – Limited– Cannot issue preferred stock – High– Can issue both common and preferred stock Limited unless electing C Corp tax treatment Dividend Taxation Distributions taxed once at shareholder level Dividends taxed twice (corporate and shareholder level) Not applicable unless taxed as C Corp Payroll Tax Implications Must pay reasonable salary to shareholder-employees Corporate officers are employees subject to payroll taxes Members typically pay self-employment tax unless S Corp election made Passive Income Limits (such as rent, interest, or certain royalties) Passive income limited to 25% of gross receipts No passive income limitations No passive income restrictions Liability Protection Protects shareholders’ personal assets Protects shareholders’ personal assets Protects members’ personal assets Conversion Flexibility Can convert to C Corp; changing to LLC requires dissolution Can convert to S Corp or LLC with filings and approvals Can elect S Corp/C Corp taxation; conversions depend on state rules Foreign Ownership Not allowed Allowed Allowed Administrative Burden Higher than LLC; less than C Corp High due to strict governance requirements Low; fewer formalities required Key Tax Advantages – Avoids double taxation– QBI deduction available – Potential for certain deductions not available to pass-through entities– Can deduct health insurance premiums for employees – Flexible tax treatment (can choose to be taxed as a partnership, S corp, or C corp)– Simpler tax compliance than C-corp if taxed as a partnership Key Tax Disadvantages – Reasonable salary requirement– Limitations on QBI deduction for certain businesses – Double taxation– More complex tax compliance – Members subject to self-employment tax (unless taxed as C-corp)– Less established than C-corps in some states Best For Small businesses seeking tax savings through pass-through taxation Larger businesses seeking growth through investment and stock issuance Startups, freelancers, or small businesses needing flexibility * For calendar-year corporations, Form 1120 is due on April 15, and Form 1120-S is due on March 15. For fiscal-year corporations, the deadline is the 15th day of the fourth month (1120) or third month (1120-S) after the fiscal year ends. # Formation costs vary by state and the scope of professional services. S Corporations Tax Filing S corps offer a unique tax structure, blending the legal benefits of a corporation with the tax advantages of a partnership. This pass-through taxation model avoids the double taxation burden of C corporations, making it an attractive option for many small businesses. Pass-Through Taxation One of the most significant advantages of an S corporation is its pass-through taxation model. Unlike C corporations, which are subject to double taxation (taxed at both the corporate and shareholder levels), S corps do not pay federal income tax at the corporate level. Instead, the corporation’s profits and losses are passed through to the shareholders, who report them on their individual tax returns (Form 1040). This structure avoids the double taxation burden and can result in significant tax savings for business owners. Form 1120-S Form 1120-S, the U.S. Income Tax Return for an S Corporation, is the primary form S corps use to report income, deductions, gains, and losses to the IRS. It ensures the corporation’s financial activity is accurately reported and provides shareholders with the information needed to complete their individual tax returns. The form is due by March 15th for calendar-year taxpayers (or the 15th day of the third month after the fiscal year ends). If additional time is needed to prepare the return, S corps can request an extension using Form 7004, which grants an automatic six-month extension. However, it’s important to note that an extension to file does not extend the deadline for paying any taxes owed. Estimated tax payments must still be made by the original due date to avoid penalties and interest. Schedule K-1 Schedule K-1 details each shareholder’s individual share of the corporation’s income, deductions, credits, and other tax items. Shareholders use this information to complete their individual Form 1040. W-2 Salary, Distributions, and Form 1040 (The Owner’s Perspective) If you own and work for an S corp, you must
