LLC vs S Corporation vs C Corporation: Which Should Your New US Business Choose?

Choosing the right business structure is not a cosmetic decision. It directly affects your taxes, personal liability, fundraising ability, compliance burden, and long-term exit options. Yet most founders rush this step, copy what they saw on YouTube, or blindly follow bad advice from friends. That mistake costs money later.

If you are starting a new business in the United States, the three most common legal structures you will encounter are LLC, S Corporation, and C Corporation. Each serves a different purpose. None is universally “best.” One wrong choice can slow growth or force a painful restructuring later.

This guide breaks down LLC vs S Corporation vs C Corporation in plain language, with real-world use cases, tax implications, and decision criteria so you can choose correctly from day one.

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Why Business Structure Matters More Than You Think

Your business structure determines:

• How much tax you pay and when you pay it
• Whether your personal assets are protected
• How easy it is to raise investment
• How profits can be distributed
• How much paperwork and compliance you must handle

Changing structures later is possible, but it is expensive, time-consuming, and sometimes tax-triggering. Smart founders decide with the end in mind.

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What Is an LLC?

An LLC (Limited Liability Company) is the most flexible and founder-friendly structure in the US. It combines the simplicity of a sole proprietorship with the liability protection of a corporation.

Key Features of an LLC

• Owners are called members
• Can have one member or multiple members
• No limit on number of members
• Members can be individuals, companies, or foreign nationals
• Flexible profit distribution rules

Taxation of an LLC

By default:

• Single-member LLCs are taxed as disregarded entities
• Multi-member LLCs are taxed as partnerships

This means profits pass through to the owners and are reported on personal tax returns. No corporate-level tax unless you elect otherwise.

An LLC can also elect to be taxed as an S Corporation or C Corporation, which gives advanced tax planning flexibility.

Pros of an LLC

• Simple and fast to set up
• Minimal ongoing compliance
• Strong liability protection
• Flexible ownership and profit sharing
• Ideal for bootstrapped businesses

Cons of an LLC

• Not attractive to venture capital firms
• Self-employment taxes can be high
• No stock structure for easy equity grants
• Less credible for large-scale fundraising

Best For

• Freelancers and consultants
• Small businesses
• E-commerce brands
• SaaS startups not raising VC
• Foreign founders testing the US market

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What Is an S Corporation?

An S Corporation is not a separate legal entity type. It is a tax election made with the IRS. A company can be an LLC or a corporation and choose S Corporation tax status if it qualifies.

Key Features of an S Corporation

• Pass-through taxation like an LLC
• Owners are called shareholders
• Must pay owners a “reasonable salary”
• Remaining profits can be distributed as dividends

Taxation of an S Corporation

This is where S Corporations shine.

• Salary is subject to payroll taxes
• Dividends are NOT subject to self-employment tax

This can save thousands in taxes if structured properly.

Ownership Restrictions

This is where S Corporations get restrictive:

• Maximum 100 shareholders
• Shareholders must be US citizens or residents
• No corporate or foreign shareholders
• Only one class of stock

Pros of an S Corporation

• Lower self-employment taxes
• Pass-through taxation
• Strong credibility compared to LLC

Cons of an S Corporation

• Strict ownership rules
• Payroll compliance required
• No foreign or institutional investors
• Limited equity flexibility

Best For

• US-based service businesses
• Agencies and professional firms
• Profitable small companies
• Founders earning steady income

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What Is a C Corporation?

A C Corporation is the standard corporate structure used by venture-backed startups and large companies. This is the default structure when people talk about “corporations.”

Key Features of a C Corporation

• Separate legal and tax entity
• Unlimited shareholders
• Can issue multiple classes of stock
• No restrictions on ownership nationality

Taxation of a C Corporation

This is the tradeoff.

• Corporation pays corporate income tax
• Shareholders pay tax again on dividends

This is known as double taxation.

However, smart planning can minimize this, especially in growth-stage companies that reinvest profits instead of distributing them.

Pros of a C Corporation

• Preferred by venture capital and angel investors
• Easy equity issuance and stock options
• Unlimited growth and scalability
• Strong legal separation

Cons of a C Corporation

• Double taxation
• Higher compliance and legal costs
• More complex governance

Best For

• Startups raising venture capital
• High-growth tech companies
• Businesses planning an IPO
• Companies with international investors

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LLC vs S Corporation vs C Corporation: Side-by-Side Comparison

Taxation

• LLC: Pass-through (default)
• S Corp: Pass-through with payroll optimization
• C Corp: Corporate tax + dividend tax

Ownership

• LLC: Unlimited, including foreign owners
• S Corp: Limited, US persons only
• C Corp: Unlimited, global investors allowed

Fundraising

• LLC: Weak for VC
• S Corp: Poor for VC
• C Corp: Excellent for VC

Compliance

• LLC: Low
• S Corp: Medium
• C Corp: High

Equity Flexibility

• LLC: Limited
• S Corp: Very limited
• C Corp: Maximum flexibility

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Which Structure Should Your New US Business Choose?

Choose an LLC if:

• You want simplicity
• You are bootstrapping
• You are a solo founder or small team
• You want flexibility and low costs

Choose an S Corporation if:

• You are a US resident
• Your business is profitable
• You want to reduce self-employment taxes
• You do not plan to raise VC

Choose a C Corporation if:

• You plan to raise external investment
• You want to issue stock options
• You are building a scalable startup
• You want maximum credibility and growth potential

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Tax Planning Impact: How Your Choice Affects Long-Term Tax Liability

Most founders obsess over registration fees and completely ignore long-term tax exposure. That is amateur thinking. The real difference between LLC vs S Corporation vs C Corporation shows up over several years, not in year one.

An LLC offers pass-through taxation, which sounds attractive, but once profits increase, self-employment tax becomes a silent killer. Every dollar of profit is exposed unless you restructure or elect S Corporation taxation. Many profitable LLC owners realize too late that they are paying thousands more than necessary each year.

An S Corporation can significantly reduce tax liability through salary and dividend separation. However, this advantage only works if salaries are properly structured. Underpay yourself and the IRS will come knocking. Overpay yourself and you lose the benefit. Precision matters here.

A C Corporation introduces corporate tax but offers powerful planning opportunities. Retained earnings, qualified small business stock (QSBS), and reinvestment strategies can reduce or defer taxes legally. This is why serious startups still choose C Corporations despite double taxation concerns.

Tax strategy should drive structure, not the other way around.

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Investor Expectations and Fundraising Reality

If you plan to raise money, stop pretending structure does not matter. Investors care deeply about it.

In the LLC vs S Corporation vs C Corporation decision, only one structure is investor-friendly at scale: the C Corporation. Venture capital firms, angel investors, and institutional funds almost universally require a C Corporation, usually incorporated in Delaware.

LLCs create tax reporting complications for investors and do not support preferred stock cleanly. S Corporations are worse because of shareholder restrictions and single-class stock rules. Most investors will walk away the moment they see an S Corp.

If fundraising is in your roadmap, even two or three years away, starting with a C Corporation avoids costly conversions later. Structure signals seriousness. Weak structure signals inexperience.

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Compliance, Governance, and Legal Risk Exposure

Founders love simplicity until it backfires. Each structure carries different compliance responsibilities that directly affect legal risk.

LLCs require minimal formalities. That is good early on, but dangerous if governance is sloppy. Poor operating agreements and undocumented decisions can pierce liability protection.

S Corporations require payroll compliance, tax filings, and strict adherence to shareholder rules. One violation can terminate S status and trigger unexpected taxes.

C Corporations demand the highest level of discipline. Board meetings, shareholder resolutions, and corporate records are not optional. The upside is stronger legal protection and clearer accountability, especially in disputes or exits.

In short, lower compliance means higher personal responsibility. Higher compliance means better protection.

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Exit Strategy: Acquisition, IPO, or Long-Term Ownership

Every serious founder should think about exit before day one. Your choice between LLC vs S Corporation vs C Corporation directly affects how clean that exit will be.

LLCs are flexible but often messy in acquisitions. Buyers prefer corporations because equity, liabilities, and ownership are easier to evaluate and transfer.

S Corporations are rarely used in major exits due to ownership restrictions and tax complications.

C Corporations dominate exits for a reason. Stock sales, mergers, and IPOs are built into the structure. If your goal includes acquisition or public listing, C Corporation is not optional. It is mandatory.

Founders who ignore exit planning trap themselves later.

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International Founders and Cross-Border Considerations

For non-US founders, the LLC vs S Corporation vs C Corporation decision becomes even more critical.

Foreign founders cannot own S Corporations. That alone eliminates it.

LLCs are popular with international entrepreneurs because of flexibility and ease of setup. However, pass-through taxation can create complex US tax filing obligations for foreign owners.

C Corporations are often the cleanest option for international founders. The company pays US taxes, shareholders are taxed only on dividends, and global ownership is allowed. This structure simplifies compliance and is preferred for cross-border operations.

Choosing the wrong structure as a foreign founder can create ongoing tax and legal headaches across multiple jurisdictions.

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Common Mistakes Founders Make

• Choosing C Corp too early and overpaying taxes
• Choosing LLC and then struggling to raise funding
• Ignoring future exit or investment plans
• Not aligning structure with tax strategy

This decision should be strategic, not emotional.

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Frequently Asked Questions (FAQs)

Conclusion

There is no universally “best” structure in the LLC vs S Corporation vs C Corporation debate. There is only the structure that matches your business goals, tax situation, and growth plan.

Founders who choose blindly pay for it later. Founders who choose strategically move faster, raise capital easier, and keep more of what they earn.

If you are serious about building a US business the right way, get this decision reviewed by professionals who understand cross-border structuring, tax efficiency, and long-term growth.

Book a consultation with Dewey & LeBoeuf LLP today to structure your US business correctly from day one and avoid costly mistakes that slow down your success.