The single most common formation question we get is some version of "should I form an LLC or a Corporation?" The honest answer is that the two structures look more alike than different from the outside, and the right one for you usually depends on three questions about how the business will be financed and taxed.
This article walks through those three questions, then gives you the right answer for the most common founder situations.
The short version
For most small businesses, freelancers, and rental-property holding companies, the answer is an LLC. It is simpler to maintain, pass-through taxed, and flexible. For most businesses planning to raise outside capital, issue equity to employees, or sell to another company, the answer is a C-Corporation, almost always formed in Delaware.
The S-Corporation is not a separate structure. It is a tax election available to both LLCs and Corporations. We will get to that.
The three questions that decide it
1. Will you raise outside capital from investors?
If yes, form a Corporationoration. Venture capital firms and most institutional investors will only invest in a Delaware C-Corp. Their fund documents typically prohibit them from owning LLC interests.
If you are not raising outside capital but want the option later, you can still start as an LLC and convert to a C-Corp before your first round. We handle the conversion routinely.
2. How will profits be taxed?
An LLC is, by default, a pass-through entity. Profits flow to the owners' personal tax returns and are taxed once, at personal rates. A C-Corp pays corporate income tax on its profits (21% at the federal level), and then owners pay personal tax again on any dividends they receive. This is "double taxation."
For most operating businesses with consistent profit, the pass-through model is more tax-efficient. For a fast-growing company that reinvests all profit, the C-Corp model is fine because there are no dividends being paid yet.
3. Will you issue equity to employees?
Employee stock options work cleanly in a Corporation. They are theoretically possible in an LLC but the tax mechanics are messier and most employees do not understand "profits interests" the way they understand stock options.
If you plan to hire employees and offer them equity, lean toward a Corporation.
The decision matrix
Here is how the three questions map to a recommendation.
| Your situation | Recommendation |
|---|---|
| Solo founder, consulting or freelancing | Single-member LLC, often with S-Corp election later |
| Small business with co-founders, no outside investors | Multi-member LLC, possibly S-Corp election |
| Rental property, holding entity, asset protection | LLC, often one per property |
| Plan to raise venture capital | Delaware C-Corp |
| Plan to hire employees and grant stock options | C-Corp or S-Corp |
| Charitable purpose | Nonprofit Corporation with 501(c)(3) status |
What an S-Corp actually is
An S-Corporation is not an entity type. It is a tax election that an LLC or a Corporation can make by filing IRS Form 2553. Once elected, the entity is taxed as a pass-through (like an LLC) but the owner can take a portion of profits as a salary and a portion as a distribution. Only the salary is subject to self-employment tax.
For a profitable consultant or freelancer making more than about $60,000 in net profit, the S-Corp election usually saves $3,000 to $8,000 per year in self-employment tax. It also adds the cost and complexity of running payroll for one person.
If you are a single-member LLC making more than $60k in profit, talk to a CPA about whether the S-Corp election makes sense for you. We can prepare and file Form 2553 for you for $99, included free on the Growth plan.
Liability protection: similar in practice
Both LLCs and Corporations protect your personal assets from the debts and obligations of the business, as long as you follow the rules. Those rules include keeping personal and business finances separate, not signing personal guarantees casually, maintaining proper records, and operating the business as a real business rather than an alter ego.
Neither structure protects you from personal liability for your own malpractice or wrongdoing, and neither protects against piercing the corporate veil if you ignore the formalities. Liability protection is not a meaningful basis to choose between the two.
What state should you form in?
If you are forming an LLC for an operating business, form in the state where you live and operate. Forming in Delaware or Wyoming when you live in California means you have to register as a foreign entity in California anyway, pay both states' fees, and maintain a registered agent in both. The supposed tax savings are usually illusory.
For a venture-backed C-Corp, Delaware is the standard, mostly because investors and their lawyers know Delaware corporate law cold. We wrote about this in a separate article on Delaware formation.
What happens if you choose wrong
Not the end of the world. We routinely convert LLCs to C-Corps when companies are about to raise their first institutional round. Converting in the other direction is also possible but more complicated. The point is: if you are not sure, an LLC is the safer default. You can always convert later.
File.Business forms LLCs, S-Corps, C-Corps, and Nonprofits in any state for $0 plus the state filing fee. We include the EIN, operating agreement (or bylaws), Registered Agent, and BOI report at no additional cost. Start your business in under five minutes →
The takeaway
Pick the structure that matches how you plan to finance and tax the business. For most founders, that is a Single-Member LLC. For a venture-track startup, that is a Delaware C-Corp. Conversion later is always possible. The structure you pick is much less consequential than the rules you follow once you have it.