Corporation Definition: C-Corp vs S-Corp vs LLC

A corporation is a legal entity created under state law that is treated as a person distinct from its owners. It can own property, borrow money, sue and be sued, and continue to exist after every original shareholder is gone. Ownership is divided into shares of stock, management sits with a board elected by shareholders, and shareholders are generally not personally liable for the company's obligations.

The defining characteristics

• Separate legal personality. The entity, not the owners, is the contracting party.

• Limited liability. Shareholders risk their investment, not their personal assets.

• Transferable ownership. Shares can be sold or transferred without dissolving the entity.

• Centralized management. A board of directors oversees officers who run day-to-day operations.

• Perpetual existence. The corporation continues until it is formally dissolved.

Those five features are what people are describing when they say a company is "incorporated." For the mechanics of getting there, see what it means to incorporate a business.

C corporation

The default. A C corp is taxed as its own entity at a flat 21% federal rate under current law, and shareholders are taxed again when profits are distributed as dividends — the double taxation problem. In exchange you get the structure institutional capital requires: unlimited shareholders, multiple classes of stock, foreign and entity investors, and preferred rounds.

Two reasons nearly every venture-backed startup is a Delaware C corp:

• Investors need preferred stock. Liquidation preferences, protective provisions, and conversion rights live in a preferred class that only a corporation can issue. See common vs preferred stockholders for how that changes exit economics.

• QSBS requires it. The Section 1202 gain exclusion on qualified small business stock is available only for stock in a domestic C corporation. Founders and early investors give up a significant tax benefit by choosing anything else.

S corporation

An S corp is not a different entity type — it is a corporation that elects pass-through taxation under Subchapter S by filing Form 2553. Profits flow to shareholders' personal returns, avoiding entity-level tax. The trade-off is a rigid set of eligibility rules:

• No more than 100 shareholders.

• Shareholders must be US individuals, certain trusts, or estates. Partnerships, LLCs, corporations, and non-resident aliens cannot hold S corp stock.

• Only one class of stock, though voting and non-voting shares are permitted.

S corps fit profitable owner-operated businesses distributing cash to a small US shareholder group. They fit venture fundraising badly, and QSBS is unavailable.

LLC

A limited liability company gives the same liability shield without corporate formalities. By default it is taxed as a partnership — or a disregarded entity with one member — so income passes through and is reported to members on a Schedule K-1. An LLC can also elect to be taxed as a C corp or S corp, which is why tax classification and legal form should be reasoned about separately.

What LLCs do better: economics. An operating agreement can define waterfalls, carried interest, capital accounts, and side letters with a flexibility corporate share classes cannot match. What they do worse: institutional equity. Most venture funds cannot or will not hold LLC interests, partly because of unrelated business taxable income concerns for their tax-exempt LPs.

Choosing between them

• Raising venture capital, granting options broadly, aiming at an IPO or acquisition: Delaware C corp.

• Profitable operating business, few US owners, distributing cash: S corp election on a corporation or LLC.

• Real estate, holding structures, investment vehicles, bespoke profit splits: LLC.

Why entity type decides whether a fund can invest

This is the part usually missing from generic entity comparisons, and it matters if you raise or deploy capital through a vehicle.

An SPV cannot invest in an S corporation without killing the election. An SPV is typically a Delaware LLC taxed as a partnership, and a partnership is an ineligible S corp shareholder. The moment it acquires shares, the S election terminates and the company becomes a C corp — retroactively creating entity-level tax the founders did not plan for. Any S corp taking outside investment through a pooled vehicle needs to revoke its election deliberately and in the right order, with tax counsel.

LLC targets create K-1 chains. When an SPV holds an interest in an operating LLC, the target issues a K-1 to the SPV, and the SPV issues K-1s to its investors — which cannot be finalized until the target's arrives. This is the single most common cause of late K-1s in private markets.

C corp targets are the clean case. The SPV holds stock, receives no operating income, and reports to investors on a straightforward K-1 reflecting fees, expenses, and eventual gain.

Allocations handles entity creation and fund administration for SPVs and funds, including tax filings and investor K-1s, so the structure you choose at formation is the structure that gets reported correctly at year end.

Frequently asked questions

What is a corporation? A legal entity formed under state law that exists separately from its owners, divides ownership into shares, is managed by a board, and shields shareholders from personal liability for its debts.

What is the difference between a C corp and an S corp? Taxation and eligibility. A C corp pays entity-level tax; an S corp elects pass-through treatment but is limited to 100 US individual shareholders and one class of stock.

Is an LLC a corporation? No. An LLC is a separate form of entity that provides comparable limited liability but is taxed as a partnership by default and has members and units rather than shareholders and shares.

Which entity is best for a startup raising venture capital? A Delaware C corporation, because investors require preferred stock and QSBS treatment is only available for C corp stock.

Can an LLC or fund own S corporation stock? No. Partnerships, LLCs, and corporations are ineligible S corp shareholders, and an acquisition by one terminates the S election.

Can a corporation be converted later? Yes. LLC-to-C-corp conversions before a priced round are routine. The tax consequences vary considerably by direction and facts, so model them before filing.

This article is for informational purposes only and is not legal or tax advice. Entity selection and tax elections have lasting consequences — consult a qualified attorney and accountant for your situation.