Choosing a Business Entity: LLC vs. Corporation

"What entity should I form?" is one of the first questions founders ask, and the honest answer is "it depends." But the factors it depends on are limited and knowable. Both LLCs and corporations give you the headline benefit — limited liability, meaning your personal assets are generally separate from the business's debts. Where they differ is in taxes, ownership, and formality.

The LLC

A limited liability company is flexible and light on paperwork, which makes it popular with small businesses and single owners.

• Profits usually "pass through" to owners' personal tax returns, avoiding a separate layer of company tax
• Fewer formal requirements — no board or annual meetings in most states
• Flexible ownership and profit-sharing set out in an operating agreement
• Can often elect to be taxed differently as the business grows

The corporation

A corporation is more structured and is the standard choice when you plan to raise venture capital or issue stock to a team.

• A well-understood framework that professional investors expect
• Stock makes it easy to grant equity, run option pools and bring on shareholders
• More formalities — a board, bylaws, minutes and annual filings
• Different tax treatment; a "C-corp" is taxed as its own entity, while an "S-corp" election can allow pass-through if you qualify

Questions that drive the decision

• Will you raise outside investment, or stay owner-funded?
• How many owners are there, and how do you want to split profits?
• How much administrative formality are you willing to maintain?
• What does your accountant say about the tax impact for your income level?

Because the tax and legal factors interact, this is a decision worth talking through with both a lawyer and an accountant before you file — it's much harder to change once you have investors or employees on board.