Limited Liability Company
C-Corp or S-Corp
A Limited Liability Company (LLC) is a business structure that combines the liability protection of a corporation with the tax benefits and operational flexibility of a partnership. LLCs are owned by "members" and can be managed by members or appointed managers.
A corporation is a separate legal entity owned by shareholders and managed by a board of directors. There are two main types: C-Corporations (taxed separately) and S-Corporations (pass-through taxation).
Feature | LLC | Corporation |
|---|---|---|
Formation Complexity | Simple | More Complex |
Liability Protection | Yes | Yes |
Tax Treatment | Pass-through (default) | C-Corp: Double taxation S-Corp: Pass-through |
Ownership Restrictions | Flexible | C-Corp: None S-Corp: Limited |
Management Structure | Flexible | Formal Structure |
Raising Capital | Limited | Excellent |
Record Keeping | Minimal | Extensive |
By default, LLCs are "pass-through" entities, meaning profits and losses pass through to the owners' personal tax returns. This avoids double taxation and provides flexibility in tax planning.
No entity-level tax in most cases
Can elect to be taxed as S-Corp or C-Corp
Losses can offset other income on personal returns
Corporations have different tax implications depending on whether they elect C-Corp or S-Corp status:
Entity pays tax, then shareholders pay tax on dividends
Can retain profits in the business at lower rates
Similar to LLC, no entity-level tax
Potential savings on self-employment taxes
LLCs are ideal for most small to medium-sized businesses that prioritize simplicity and flexibility:
Corporations are better suited for businesses with growth ambitions and complex ownership needs:
Sarah runs a digital marketing consultancy with 3 employees. She chose an LLC because she wanted liability protection without the complexity of corporate formalities. The pass-through taxation allows her to deduct business losses against other income, and she appreciates the operational flexibility.
Why LLC worked: Simple operations, no need for investors, tax flexibility important
Mike's software startup needed to raise venture capital and attract top talent with stock options. Despite the double taxation and administrative burden, the C-Corporation structure was essential for investor requirements and employee equity compensation.
Why Corporation worked: Needed investment capital, stock options for employees, planning for IPO
Jennifer and her two partners invest in rental properties. They chose an LLC for the liability protection, flexible ownership percentages (50%, 30%, 20%), and pass-through taxation that allows them to deduct depreciation and losses.
Why LLC worked: Multiple owners, flexible profit sharing, real estate tax benefits
If yes → Corporation (especially C-Corp) | If no → LLC likely better
If yes → Corporation | If no → LLC works fine
Very important → LLC | Don't mind complexity → Corporation okay
Yes → LLC | No, equal sharing is fine → Either works
Both provide liability protection, but consider professional liability insurance regardless
Yes, but it's not always simple or tax-efficient. Here are your options:
Possible but may trigger tax consequences. Consult a tax professional.
More complex and often triggers significant tax consequences.
LLCs can elect corporate taxation; S-Corps can convert to C-Corps more easily.
Most small businesses benefit from LLC formation. Start your LLC today and get the liability protection and tax benefits you need.
Ready to form an LLC? Start with our complete California formation guide.
Once you've chosen LLC, get professional help with your operating agreement.