# Choosing an entity: LLC or C corporation What an LLC and a C corporation are, how each is created and taxed in the United States, and the questions to bring to counsel and a tax professional. Canonical URL: https://worldenterprise.org/insights/choosing-an-entity-llc-or-c-corporation/ Last updated: 2026-10-10 Publisher: World Enterprise, run by World Enterprise Group Incorporated *General information as of October 10, 2026. It is not legal or tax advice, and it describes United States sources only. A lawyer licensed where your company will be formed, and a tax professional, can say what applies to your facts.* A company is not only an idea and a bank account. In the United States it is also a legal form, created under the law of a state, and the form chosen determines which income tax return the business files with the Internal Revenue Service. This article looks at two forms, the limited liability company and the C corporation. It explains what each one is, what the primary sources say about it and which questions are worth taking to counsel. ## The choice is made under state law and federal tax law at once The IRS puts the starting point plainly: when beginning a business, you must decide what form of business entity to establish, and the form you choose determines which income tax return you file. It lists the sole proprietorship, the partnership, the corporation and the S corporation as the most common forms, and it describes the limited liability company as a business structure allowed by state statute. That last phrase matters. A state creates the entity; the federal government then decides how to tax it. Two separate bodies of law are involved, and a form that looks simple in one can behave differently in the other. The sections below take them in turn. ## What a limited liability company is The IRS says each state may use different regulations for limited liability companies, and that owners are called members. Most states do not restrict who may be a member, so members can be individuals, corporations, other LLCs or foreign entities, and there is no maximum number. Most states also permit an LLC with a single owner. For federal income tax, the IRS treats an LLC according to its members. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files a form with the IRS. An LLC with one member is treated as an entity disregarded as separate from its owner for income tax. The IRS adds that for employment tax and certain excise taxes, a single-member LLC is still considered a separate entity. The rules inside the company come mainly from a private contract. Delaware's LLC statute states a policy of maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. The written agreement among the members is therefore a place where the company's internal rules can be set, and counsel can say how its terms would work. ## What a C corporation is The IRS describes forming a corporation as prospective shareholders exchanging money, property or both for the corporation's capital stock. For federal income tax purposes, a C corporation is a separate taxpaying entity. The IRS explains that its profit is taxed to the corporation when earned and taxed again to shareholders when distributed as dividends, which it calls a double tax. It also notes that shareholders cannot deduct a loss of the corporation. The management structure is set by statute. In Delaware, the business and affairs of a corporation are managed by or under the direction of a board of directors, except as the statute or the certificate of incorporation provides otherwise. A corporation therefore has shareholders who own it and a board of directors that oversees it, and ownership is expressed as stock. ## Side by side | Question | LLC | C corporation | |---|---|---| | Created by | A filing with the state; Delaware's office calls it a certificate of formation | A filing with the state; Delaware's office calls it a certificate of incorporation | | Owners are called | Members | Shareholders | | Default federal income tax treatment | Partnership if two or more members; disregarded if one (IRS) | A separate taxpayer (IRS) | | Where the internal rules sit | The written LLC agreement, which the statute gives maximum effect | The statute, adjusted by the certificate of incorporation | | How ownership is written | As the LLC agreement sets out | Capital stock | The table gives categories, not a recommendation. Each cell has exceptions, and states differ. ## Where state law enters Delaware serves here as one worked example of how a state writes its filing rules. Its Division of Corporations describes certificate of incorporation and certificate of formation forms with instructions and fees, and describes a name reservation that holds an entity name for 120 days. That detail is a Delaware rule, not a national one. Whether a company formed in one state but operating in another has further filings in the second state is a question for counsel in that state. ## Why the form matters for the documents that follow Ownership records, founder agreements, equity grants, intellectual property assignments and investment instruments may each depend on the form. A few examples of the connection, each framed as a question rather than an answer: - Ask counsel and a tax professional whether equity grants to founders and employees are written differently for stock than for an LLC, and how your planned grants would work in each form. The related article on [founder equity splits and vesting](https://worldenterprise.org/insights/founder-equity-splits-and-vesting/) describes the mechanics when ownership is expressed as stock. - The 83(b) election discussed in a companion article is a tax matter; ask a tax professional whether and how it would arise in your structure. - Ask counsel which investment instruments your entity can issue and which documents assume shares of stock. Whether a company could change form later, and what that would involve, is a question for counsel and a tax professional. ## Other forms exist This article compares two forms. The IRS lists others, including the sole proprietorship, the partnership and the S corporation, and it points to a separate Small Business Administration page for more on choosing among them. The S corporation has its own rules, which this article does not describe. ## Questions to take to counsel and a tax professional Preparing questions makes a paid hour go further. The [questions to ask your counsel before you sign](https://worldenterprise.org/insights/questions-to-ask-your-counsel-before-you-sign/) offers a general list for any agreement. For the entity choice, these are specific starting points: 1. Which state's law would govern the company, and what does that state require at formation and every year after? 2. What does each form mean for my personal liability, and what does it not protect against? 3. How would the company be taxed federally in each form, given the number of owners and the plans for outside investors? 4. Which form fits the equity I expect to grant to founders and to the first hires? 5. If I later raise money from outside investors, which documents would assume one form or the other? 6. What records does the company need to keep, and who keeps them? The [seed data room checklist](https://worldenterprise.org/library/seed-data-room-checklist/) shows how such records are organized for a reviewer. 7. What would changing form cost in time, tax and paperwork if my plans change? A dated note of each answer and the reason given becomes a record of why the company is built the way it is. ## What this article cannot tell you It does not say which form is right for you. That depends on your state, your co-founders, your tax position, your investors and your plans, and a decision of this kind belongs with a lawyer and a tax professional who have your documents in front of them. It describes United States sources only. Founders outside the United States, or forming a company in another country, face different entity types and different tax law that this article does not cover. It uses Delaware as an example of how a state writes its rules, as one example. It does not claim that Delaware is the right state for any company, and it does not describe other states' statutes. It gives no tax rates, filing fees or deadlines. Those change, and they were not part of the primary sources read for this article. It also does not discuss every entity type; the IRS lists others, and some states offer more. The sources were read on October 10, 2026. The IRS, state statutes and agency pages are updated from time to time, so a rule that matters to a decision should be confirmed on the current page or with counsel. ## Sources - Business structures. Internal Revenue Service. - Limited liability company (LLC). Internal Revenue Service. - Forming a corporation. Internal Revenue Service. - General Corporation Law, Subchapter IV: Directors and Officers. Delaware General Assembly. - Limited Liability Company Act, Subchapter XI: Miscellaneous. Delaware General Assembly. - How to form a new business entity. Delaware Division of Corporations.