Choosing a business structure is one of the first major decisions founders face. For most startups in the United States, the choice usually comes down to two options: forming a Limited Liability Company (LLC) or a corporation.
This decision affects how a business is taxed, how ownership works, how easy it is to raise money, and how much ongoing paperwork is involved. For many founders, the right choice becomes clearer once they understand a few core differences.
Common Patterns in Structure Selection
Founders often consider an LLC when:
- Bootstrapping and not planning to raise outside investment soon
- Seeking simpler setup and fewer ongoing formalities
- Valuing flexibility in how profits are distributed
- Running a service-based, local, or owner-operated business
Corporations are commonly chosen by startups that:
- Plan to raise money from investors
- Want to offer equity or stock options to employees
- Are building high-growth businesses
- Are planning for a future acquisition or public offering
What Makes LLCs and Corporations Different?
LLCs: Flexible and Founder-Friendly
An LLC is one of the most common structures for small businesses and early-stage startups because it offers flexibility and simplicity.
Key Advantages
- Simpler administration: Fewer formal requirements compared to corporations
- Pass-through taxation: Business profits typically flow through to owners' personal tax returns
- Flexible profit sharing: Profits can be allocated in ways that don't strictly match ownership percentages
- Lower ongoing costs: Fewer compliance requirements often mean lower costs
- Customizable rules: Operating agreements can be tailored to how founders want the business to run
Common Considerations
- Investor hesitation: Many institutional investors prefer corporations
- Equity limitations: Traditional stock options are not typically available
- Self-employment taxes: Owners may owe self-employment taxes on profits
- Perception considerations: Some partners or lenders are more familiar with corporate structures
Corporations: Built for Growth
A corporation is a separate legal entity that can issue stock. This structure is commonly used by startups planning to grow quickly or raise outside capital.
Key Advantages
- Investor-friendly: Preferred by venture capital and many angel investors
- Equity compensation: Ability to offer stock or stock options to employees
- Clear ownership structure: Shares clearly define ownership interests
- Scalability: Designed for businesses with long-term growth plans
- Exit flexibility: Easier to sell ownership interests through stock transactions
Common Considerations
- More formalities: Board meetings, corporate records, and formal governance typically required
- Higher compliance costs: Legal and accounting costs are often higher
- Less flexibility: Corporate rules are generally more rigid than LLC operating agreements
What About S Corporations?
An S corporation is a special tax classification, not a separate business type. It combines corporate structure with pass-through taxation but comes with limitations, including:
- A limit on the number of shareholders
- Restrictions on who can own shares
- Only one class of stock allowed
Because of these restrictions, S corporations are often less suitable for startups planning to raise outside investment.
Questions Founders Often Consider
1. Investment plans for the next 1–2 years
Founders planning to raise outside investment typically consider corporations, as most institutional investors prefer this structure.
Founders not planning immediate outside investment often find LLCs provide the simplicity they need.
2. Equity incentives for employees or co-founders
Businesses planning to offer stock options or equity compensation typically benefit from corporate structure.
Businesses without immediate equity compensation needs often find LLCs sufficient.
3. Future sale or large-scale growth intentions
Founders building with a future acquisition or large-scale growth in mind commonly choose corporations.
Founders focused on sustainable, owner-operated businesses often prefer LLCs.
Can Structures Change Later?
Yes. Many businesses change structures as they grow and their needs evolve.
- LLC to corporation conversions are common and generally manageable
- Corporation to LLC conversions are more complex and can have tax consequences
Because of this flexibility, some founders start with an LLC and convert later if investment or growth plans change. The conversion process typically involves legal and tax considerations that benefit from professional guidance.
Tax Considerations
Taxes are an important factor, though they typically shouldn't be the only consideration driving this decision.
- LLCs typically offer pass-through taxation by default (though they can elect other tax treatments)
- Corporations may be subject to corporate-level taxes, depending on classification (C-Corp vs. S-Corp election)
- Tax outcomes vary based on income level, ownership structure, and individual circumstances
In practice, founders often choose a structure based on business goals first, then work with tax professionals to optimize tax treatment within that structure.
Typical Next Steps After Choosing a Structure
Once a founder has chosen a structure, common next steps include:
- Select and check availability of a business name
- File formation documents with the appropriate state agency
- Obtain an EIN from the IRS
- Create governing documents (operating agreement for LLCs or bylaws for corporations)
- Open a business bank account
- Register for applicable taxes or licenses
Final Thought
There is no single "right" answer for every startup. The structure that works best is typically the one that fits current goals while leaving room to adapt as the business evolves.
Understanding the differences now can help founders avoid unnecessary complexity, reduce future costs, and make more confident decisions as they build.