LLC vs C-Corp: Which Structure Is Right for Your Business?
For most small businesses and freelancers, an LLC is the right choice — pass-through taxation, no double tax, simpler to operate. A C-Corp makes sense only if you plan to raise venture capital, need preferred stock for investors, or want access to the QSBS capital gains exclusion.
By Edmond Hui · Last updated: January 2026
LLC vs C-Corp: Side-by-Side Comparison
| Factor | LLC | C-Corp |
|---|---|---|
| Legal entity | Separate legal entity | Separate legal entity |
| Liability protection | Yes — personal assets protected | Yes — personal assets protected |
| Federal income tax rate | Pass-through — owner's personal rate (10–37%) | 21% flat corporate rate + dividend tax (double taxation) |
| Double taxation | No — income taxed once at owner level | Yes — profits taxed at corporate level, dividends taxed again |
| Number of owners/shareholders | Unlimited members | Unlimited shareholders |
| Foreign ownership | Non-US citizens can be members | Non-US citizens can hold shares |
| Investor-friendly equity | Membership units (less flexible) | Preferred stock, multiple share classes — standard for VC |
| Qualified Small Business Stock | Not eligible | Eligible — up to $10M tax-free gain exclusion (IRC §1202) |
| Retained earnings | All profit flows to members | Can retain profits at 21% corporate rate to reinvest |
| Fringe benefits | Owner fringe benefits often taxable | Broader tax-free fringe benefits for owner-employees |
Frequently Asked Questions
What is the difference between an LLC and a C-Corp?
Both provide limited liability protection. The key difference is taxation and ownership structure. An LLC is taxed as a pass-through entity by default — all profit flows to the owners' personal returns and is taxed at personal income tax rates. A C-Corp is taxed as a separate entity at a flat 21% federal corporate rate. When the C-Corp distributes profits to shareholders as dividends, those dividends are taxed again at the shareholder level — this is the 'double taxation' problem. LLCs avoid double taxation entirely.
Should I form an LLC or a C-Corp for a startup?
If you plan to raise venture capital, a Delaware C-Corp is the standard. VCs use preferred stock structures that do not work cleanly with LLC membership units. Additionally, employees expect stock options, and the qualified small business stock (QSBS) exclusion under IRC Section 1202 lets C-Corp founders exclude up to $10 million in capital gains from federal tax — a benefit unavailable to LLC members. If you are not raising venture capital and want simplicity, an LLC is almost always the better choice.
Can an LLC convert to a C-Corp later?
Yes. Most states allow an LLC to convert to a corporation by filing a conversion document (sometimes called a statutory conversion or domestication). Delaware is particularly popular for this because of its founder-friendly corporate law and established case law. The conversion is a taxable event under federal law in most cases — you should consult a tax professional before converting.
Is a C-Corp subject to state income tax?
Yes, in most states. C-Corps pay both federal income tax (21%) and state corporate income tax, which ranges from 0% (Nevada, Wyoming) to 9.8% (Minnesota). This further increases the effective tax rate compared to an LLC that passes income through to owners.
What is double taxation and does it always apply to C-Corps?
Double taxation means corporate profits are taxed twice: first at the 21% corporate rate when earned, then again at the shareholder level when distributed as dividends (typically at 15–20% for qualified dividends). However, if owners take all compensation as salary, there may be little profit left to distribute — effectively avoiding dividend taxation. For small closely-held C-Corps with owner-employees, double taxation is often minimal in practice.
LLC vs C-Corp by State
State corporate tax rates and filing requirements vary. Find your state-specific guide below.