Choosing between a corporation (Inc.) and a limited liability company (LLC) affects how your business is taxed, how profits are shared and how much paperwork you need. While both LLCs and corporations can elect corporate tax treatment, corporations are structured by default as separate tax entities, which can make it easier to retain earnings (reinvest profits) rather than passing them through to owners as taxable income each year. LLCs, by comparison, are default pass-through entities, meaning profits are typically distributed and taxed on the owners’ personal returns unless the LLC elects corporate taxation. A financial advisor or tax professional can help you choose the structure that fits your goals.
Inc. vs. LLC: Tax Differences
The primary distinction between an Inc. and an LLC lies in how each is taxed and how income flows through the business to its owners. While both structures offer liability protection, their tax obligations and flexibility vary significantly.
LLC Taxation
An LLC is typically taxed as a pass-through entity. This means the business itself does not pay federal income tax. Instead, profits and losses pass through directly to the owners. The owners, also called members, report this as income on their personal tax returns. By default:
However, LLCs can also elect to be taxed as an S corporation or a C corporation by filing IRS Form 2553 or Form 8832, respectively. This flexibility allows business owners to optimize their tax strategy based on their income level, business expenses and growth plans.
Corporation (Inc.) Taxation
- A C corporation is taxed as a separate legal entity. It pays corporate income tax on its profits, and shareholders also pay personal taxes on dividends. This is known as double taxation.
- An S corporation, while still a corporation, is a pass-through entity for tax purposes. Income is reported on the shareholders’ personal tax returns, avoiding double taxation, but with more restrictions on ownership and profit distribution.
Corporations must file a corporate tax return (Form 1120 or 1120-S) and may face additional compliance and administrative costs.
Inc. vs. LLC: Pros and Cons
Choosing between an Inc. and an LLC means weighing flexibility against structure and simplicity against growth potential. Each offers distinct benefits and trade-offs depending on your business needs and long-term goals.
| Entity Type | Pros | Cons |
| LLC (Limited Liability Company) | – Pass-through taxation avoids double taxation – Flexible management structure (no board required) – Option to elect S corp status, potentially reducing self-employment taxes – Fewer formalities and simpler compliance |
– Less appealing to investors and venture capital firms – Some states impose extra LLC -specific fees or taxes – Less-established legal precedent can create uncertainty in disputes |
| Corporation (Inc.) | – Preferred by investors due to standardized structure – Clear legal framework and strong case law – Ability to issue multiple classes of stock for C corporations – Best suited for businesses planning to go public |
– C corps are subject to double taxation (corporate + dividend) – Greater administrative complexity (board meetings, bylaws, filings) – S corp election has ownership and shareholder restrictions |
Inc. vs. LLC: Which One Is Right for You?
The decision between forming an Inc. or LLC comes down to your business size, goals and how you plan to grow and manage the company.
If you’re a solo entrepreneur or starting a small business that you plan to keep closely held, an LLC offers simplicity and tax flexibility. For example, a freelance consultant earning $120,000 a year might choose to form an LLC and elect S corp taxation to reduce self-employment tax while keeping paperwork minimal.
If you’re building a business with multiple investors, plan to seek venture capital or intend to go public one day, forming a corporation is likely a better fit. For instance, a tech startup planning to scale rapidly and raise seed funding might choose to incorporate as a Delaware C corporation to appeal to institutional investors.
There’s no one-size-fits-all answer. Consider your current income, long-term growth plans and how you want to be paid. A financial advisor can help you model both scenarios to determine which structure supports your goals while minimizing tax liability.
Frequently Asked Questions
Can an LLC Avoid Self-Employment Tax?
LLC owners typically pay self-employment tax on their share of profits. However, if the LLC elects S corp taxation, owners can pay themselves a reasonable salary (subject to payroll taxes) and take remaining profits as distributions. Since distributions are not subject to self-employment tax, this can lower their overall tax burden. Bear in mind, avoiding self-employment taxes on earnings may reduce your future Social Security benefits.
Is an Inc. Better for Startups Than an LLC?
Most of the time, startups planning to raise money from outside investors find a corporation provides more advantages than an LLC. Investors typically prefer corporations because of the structure, legal protections and ability to issue stock. C corporations are especially common for startups backed by venture capital.
Which Is Easier to Maintain: Inc. or LLC?
An LLC is generally easier to maintain. It requires fewer formalities — no meetings, fewer filing requirements and more management flexibility. Corporations, by contrast, must maintain bylaws, hold annual meetings and keep detailed corporate records.
Bottom Line
When choosing between Inc. vs. LLC, the right structure depends on your business goals, how you want to be taxed and the level of complexity you’re prepared to manage. LLCs are often better for small businesses and solo entrepreneurs who value tax flexibility and simplicity. Corporations may be the right choice for those seeking investors or planning to scale quickly.
Tax Planning Tips
- If you are looking for ways to lower your tax liability, a financial advisor who specializes in tax planning can help optimize your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.
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