Got a Business Idea? Should you form an LLC or a Corporation?

Got a Business Idea? Should you form an LLC or a Corporation?

by Reiko Joseph, December 2009

Should I form a corporation or an LLC? It's a common question among business owners and one that deserves careful consideration. While both are excellent choices for personal liability protection, each structure offers its own set of distinct advantages. Choosing the right one for your company depends on your particular business, operational needs and tax strategy.

Advantages of a Corporation







  • Wider Recognition


    The American corporation has been around as long as America itself. It enjoys wide recognition and acceptance as a legal entity everywhere in the United States. By contrast, the LLC is a fairly new entity and although recognized as a legitimate business structure, it still experiences occasional business restrictions in a handful of states.

  • No Self-Employment taxes


    For many entrepreneurs, one of the most attractive benefits of forming a corporation is the ability to only pay self-employment taxes on salary, and not on profits. For example, if your corporation earns a total of $60,000 but you pay yourself a salary of $40,000, the remaining $20,000 profit would not be subject to self-employment taxes. This alone saves you over $3,000 per year. LLCs on the other hand are required to pay self-employment taxes on all taxable company income—including salary and profits.

  • Greater Tax Planning Flexibility


    Unlike LLCs, traditional C corporations allow you the flexibility to shift your corporate income to minimize your overall tax burden. You have the option, for example, to deduct your own salary as an expense to lower your corporation's total taxable income. You also have the flexibility to decide whether you want to retain any corporate profits for future expenses or to distribute them to shareholders as dividends.

  • Greater Variety of Fringe Benefits


    Corporations enjoy a wide variety of fringe benefit plans such as retirement plans, employee stock purchase plans, medical plans and medical reimbursement plans for costs not covered by insurance. While LLCs are also allowed fringe benefits, there are fewer options to choose from.

Advantages of an LLC




  • Minimal Corporate Formalities


    LLCs are similar in structure to general partnerships but come with the added benefit of personal liability protection for their members. Because of their relative simplicity, LLCs are easy to maintain and require a lot fewer state-mandated formalities than corporations. Whereas corporations must hold regular meetings of the board of directors and shareholders, keep written corporate minutes, and file annual reports with the state, members of an LLC are not required to hold any such formal meetings. And in many states, LLCs are not even required to file an annual report.

  • No "Double Taxation"


    By default, an LLC is treated as a "pass-through" entity, meaning all of the LLC's profits are passed directly to its members who pay taxes only once at their individual tax rates. By contrast, a traditional C corporation pays taxes twice—first on its corporate income, and then again when shareholders pay taxes on their profits (dividends). To avoid this "double taxation" bind, many people choose to either set up their company as an LLC or elect to have their corporation treated as a pass-through entity. Corporations set up as pass-through entities are known as S corporations.

    Another benefit of forming an LLC is the ability to deduct your operating expenses directly against your income, as both company profits and losses are passed straight to the members of an LLC. This makes for fairly simple accounting come tax time. With a C corporation, operating expenses are only deducted against corporate income, not shareholder profits.



    One final tax advantage of forming an LLC is that as a member-employee, you are not required to pay unemployment insurance taxes on your salary. Corporations, on the other hand, are required to pay this tax. Currently, the federal unemployment tax (FUTA) is 6% of the first $7,000 of wages paid, to a maximum of $420 per employee per year. However, the FUTA provides for a credit of 5.4% for payment of state unemployment insurance taxes, making the effective federal tax rate 0.6% or $42 per employee per year.

  • No Ownership Restrictions


    Unlike corporations, LLCs place no limits on the number of members you can have. With an S corporation, you are limited to 100 stockholders and each stockholder must generally be an individual who is either a resident or citizen of the United States. With an LLC it is also easy to place your ownership interest into a living trust. Placing shares of an S corporation into a trust instrument is much more restrictive.

    Additionally, an S corporation is not able to offer different classes of ownership, which may affect its ability to raise money from third-party investors. However, an LLC is not so restricted and is free to offer different levels of ownership.

Protect your business and reduce your business taxes by forming a corporation or LLC. Form a corporation or LLC online with LegalZoom.