Stellar Blog | Understanding The Difference between LLC and Corporation

In this article

Share this article

Starting a business means making decisions—big ones. One of the most important is choosing the right structure. For many entrepreneurs, it boils down to this: LLC vs. Corporation (C-Corp). Each option offers unique benefits, but the right choice depends on your goals, where you operate, and how you plan to grow. This guide dives deep into the differences between these structures—covering costs, compliance, taxes, and more—so you can make an informed decision. Let’s break it down...

What’s the Difference Between an LLC vs Corporation?

Both LLCs (Limited Liability Companies) and Corporations (C-Corp) shield owners from personal liability, but they differ in flexibility, compliance, and tax treatment. Here’s a closer look:

LLC vs Corporation Table

LLC vs Corporation Comparison

Category	LLC	Corporation
Initial Fees	Lower costs: $50–$500 (varies by state or country). File "Articles of Organization."	Higher costs: $100–$500 (varies by state or country). File "Articles of Incorporation" and adopt bylaws.
Ongoing Compliance	Minimal formalities: No mandatory meetings or minutes. Annual or biennial reports ($20–$500).	Requires directors, shareholder meetings, and recorded minutes. Reports often cost more ($100–$500+).
Federal Taxes	Pass-through taxation: Income reported on members’ personal returns. Self-employment tax (15.3%) on profits.	Corporate tax rate: Flat 21% (U.S. example). "Double taxation": Corporate income taxed, then dividends taxed again.
Foreign Compliance	Foreign owners must file Form 1040-NR and Form 5472 (if applicable).	Foreign shareholders file Form 5472 if owning 25%+ of the corporation.
Attracting Investors	Less appealing to venture capital or institutional investors.	Preferred by investors due to stock structure and fundraising options.
Ownership Restrictions	Unlimited members; individuals, corporations, and other entities allowed.	Unlimited shareholders for C Corp; S Corp status prohibits foreign shareholders.
Exit Strategy	Harder to transfer ownership.	Easier to sell shares or go public.
Best For	Small to medium-sized businesses prioritizing flexibility.	High-growth businesses seeking investment or planning to scale significantly.

Why Choose an LLC?

An LLC is often compared to the Swiss Army knife of business structures. It’s versatile and works well for smaller companies or startups that prioritize simplicity and cost-efficiency.

Flexibility: Owners—called “members”—can structure management however they want.
Lower Compliance Burden: No mandatory board meetings or corporate minutes.
Pass-Through Taxation: Profits pass directly to members, avoiding corporate taxes.

But here’s the catch: LLCs aren’t always ideal for businesses looking to scale quickly or attract investors.

Why Choose a Corporation?

A Corporation is like a high-performance sports car—powerful and built for speed, but it requires more upkeep. Corporations are a go-to for high-growth businesses planning to raise funds or go public.

Attracts Investors: The stock structure makes it easier to secure venture capital.
Defined Rules: Corporate bylaws and meetings keep the business organized.
Separate Taxes: Corporate profits are taxed independently from shareholders.

One drawback? The dreaded “double taxation.” Corporations pay corporate taxes, and shareholders pay taxes on dividends. However, this can be mitigated by choosing an S Corporation (where profits pass directly to shareholders, like in an LLC).

Key Considerations for Global Founders

For entrepreneurs operating internationally—especially Canadian founders eyeing U.S. expansion—there are unique factors to consider:

Withholding Taxes
- LLCs: Foreign members face withholding on ECI at 37%.
- CCorps: Dividends to foreign shareholders subject to 30% withholding tax.
Foreign Ownership
- LLCs: Unlimited members, individuals corporations and other entities are allowed to hold ownership.
- CCorps: Unlimited shareholders for C-Corps. Important to note that for S-Corps, foreign shareholders are prohibited.
Cross-Border Compliance
- LLCs: Foreign owners must file Form 1040-NR and Form 5472(If applicable).
- CCorps: Foreign shareholders file Form 5472 if they own >25% of the corporation.
Investor Preference
- Global investors often favor Corporations due to standardized stock options and the potential for public offerings.

Common Misconceptions

Let’s clear up a few myths:

“LLCs are always cheaper.”
Some states impose high franchise or gross receipts taxes on LLCs. For instance, California charges a minimum of $800 annually—making it pricier than you’d think.
“Corporations are too rigid.”
While Corporations have stricter rules, they’re also designed for scalability. If you plan to raise funds or expand internationally, the structure pays off.

Which is Right for You?

It depends on your goals:

If you’re a small business owner prioritizing simplicity and cost, an LLC might be the way to go.
If you’re planning to attract investors or take your company public, a Corporation is likely the better choice.

Conclusion: Choose Wisely—Plan for Growth

The decision between LLC and Corporation isn’t just about where you are now—it’s about where you’re going. Think long-term. How do you see your business evolving?

Still unsure? A consultation with us can help you navigate the complexities of your specific situation.

Your business structure sets the stage for your success—choose wisely, and you’re off to a great start!

Schedule a call with us today or launch your US entity immediately here.

‍