C-Corp vs LLC: Taxes, Structure & When to Choose Each
Choose a C-Corp if you're building a venture-backed startup, plan to go public, or need to offer stock options. Choose an LLC for everything else — small businesses, real estate, partnerships, and businesses that want simpler taxes and less paperwork.
C-Corp vs LLC: Side-by-Side Comparison
| Category | C-Corp | LLC |
|---|---|---|
| Liability Protection | Full personal asset protection | Full personal asset protection |
| Federal Tax Rate | 21% corporate rate (+ tax on dividends) | Pass-through to personal rates (10–37%) |
| Double Taxation | Yes — corporate level + shareholder level | No — single level of taxation |
| Raising VC Funding | Strongly preferred by investors | Possible but uncommon |
| Stock Options | Yes — ISOs and NSOs | No — only profits interests |
| Ownership Classes | Multiple stock classes (common, preferred) | Flexible membership interests |
| Ongoing Compliance | Board meetings, minutes, annual meetings | Annual report only in most states |
| Best For | VC-backed startups, IPO track | Small businesses, real estate, partnerships |
Liability Protection
Full personal asset protection
Full personal asset protection
Federal Tax Rate
21% corporate rate (+ tax on dividends)
Pass-through to personal rates (10–37%)
Double Taxation
Yes — corporate level + shareholder level
No — single level of taxation
Raising VC Funding
Strongly preferred by investors
Possible but uncommon
Stock Options
Yes — ISOs and NSOs
No — only profits interests
Ownership Classes
Multiple stock classes (common, preferred)
Flexible membership interests
Ongoing Compliance
Board meetings, minutes, annual meetings
Annual report only in most states
Best For
VC-backed startups, IPO track
Small businesses, real estate, partnerships
Liability Protection
Both C-Corps and LLCs provide identical personal asset protection. Your personal property is shielded from business debts and lawsuits in either structure.
Tax Treatment
This is the biggest practical difference. C-Corps face "double taxation": the corporation pays 21% federal tax on profits, then shareholders pay personal income tax on dividends received.
LLCs have pass-through taxation by default — profits are taxed once on the owners' personal returns. This eliminates double taxation entirely.
However, C-Corp taxation isn't always worse. If you're reinvesting all profits into growth (not paying dividends), the 21% corporate rate may be lower than your personal rate. And the Qualified Small Business Stock (QSBS) exclusion can exempt up to $10 million in capital gains when you sell a C-Corp.
Raising Investment
If you plan to raise venture capital, a C-Corp (specifically a Delaware C-Corp) is almost always required. VCs expect familiar stock structures, preferred share classes, and established legal frameworks.
LLCs can accept investment, but the legal structure is less familiar to institutional investors. Converting from LLC to C-Corp later is possible but adds cost and complexity.
If fundraising is even a possibility, start as a C-Corp to avoid a costly conversion later.
Ongoing Requirements
C-Corps require annual shareholder meetings, board meetings, corporate minutes, and formal record-keeping. These governance requirements add cost and complexity.
LLCs have minimal requirements — just annual reports and a registered agent in most states. No board meetings, no minutes, no formal governance unless you choose to have it.
Cost Comparison
Formation costs are similar. State filing fees are typically the same for C-Corps and LLCs.
Ongoing costs diverge. C-Corps need more expensive tax returns (Form 1120), may need corporate counsel for governance, and have higher administrative overhead. LLCs are simpler and cheaper to maintain annually.
That said, C-Corps raising investment can use investor funds to cover these costs, making the comparison less relevant for funded startups.
Which Should You Choose?
Choose C-Corp if...
- You're building a startup and plan to raise VC or angel funding
- You want to offer stock options (ISOs) to employees
- You plan to go public or be acquired
- You want to take advantage of the QSBS capital gains exclusion
- You're reinvesting all profits at the 21% corporate tax rate
Choose LLC if...
- You're a small business not seeking venture capital
- You want to avoid double taxation
- You want simpler governance and less paperwork
- You own real estate or investment properties
- You want flexible profit distribution among owners
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Frequently Asked Questions
Can I convert an LLC to a C-Corp?
Yes. Most states allow statutory conversions or mergers. It typically costs $1,000–$5,000 in legal fees. If you think you might raise VC funding, starting as a C-Corp avoids this cost.
What is the QSBS exclusion?
The Qualified Small Business Stock (Section 1202) exclusion lets shareholders exclude up to $10 million in capital gains when selling C-Corp stock held for 5+ years. This is a major tax advantage for startup founders.
Why do VCs prefer C-Corps?
VCs prefer C-Corps because of familiar stock structures (common vs. preferred shares), established legal precedents for investor protections, the ability to issue incentive stock options (ISOs), and the QSBS tax exclusion.
Is an LLC or C-Corp better for a solo founder?
For a solo founder not raising VC funding, an LLC is almost always better — simpler taxes, less paperwork, and lower ongoing costs. If you're a solo founder planning to raise VC, start with a Delaware C-Corp.