LLC vs. C-Corp vs. Nonprofit: Which U.S. Business Structure Is Right for You?

A U.S. business structure decision has two levels: the entity you register with a Secretary of State, and the federal tax classification the IRS applies to that entity. LLC, C corporation and nonprofit corporation are entities. S corporation is a Form 2553 tax election available to eligible LLCs and corporations.

Key takeaways

• LLC, C corporation and nonprofit corporation are state entities; S corporation is an IRS tax election.
• A non-resident alien cannot be an S corporation shareholder, but can own an LLC or C corporation.
• C corporations compute federal tax at a flat 21% rate under IRS Publication 542 (rev. January 2024).
• A nonprofit corporation has no owners, and assets are permanently dedicated to the exempt purpose.
• Annual carrying cost matters more than formation fee: California charges an $800 annual tax on any LLC doing business there, whatever state it was formed in.

Founders choosing a first U.S. entity, including international founders who never set foot in a U.S. office, are reading comparison articles that two 2025 changes made stale. FinCEN stopped requiring beneficial ownership reports from U.S. companies in March 2025, and the qualified business income deduction became permanent. What follows covers each entity, its taxation, its annual cost, the non-resident rules, and conversion.

What is the difference between an entity and a tax classification?

An entity is a legal person created under state law. A tax classification is how the IRS treats that entity, because "your form of business determines which income tax return form you have to file" (IRS, Business Structures).

Default classifications follow ownership. A domestic LLC with two or more members is "classified as a partnership," and a single-member LLC is "treated as an entity disregarded as separate from its owner," unless Form 8832 elects corporate treatment (IRS, Limited Liability Company).

The table below maps each entity to its default federal treatment, election, and return.

Use column two to see what the IRS assumes before you elect anything (IRS, LLC Filing as a Corporation or Partnership).

What is an LLC, a C corporation, or a nonprofit corporation?

Each entity solves a different ownership problem. The real differences are governance and tax.

What is an LLC?

An LLC is a state law entity that gives its owners, called members, limited liability while defaulting to pass-through taxation. Formation starts with articles of organization filed with the state, and the SBA describes an operating agreement as something it is "widely recommended to create" even where a state does not mandate it (SBA, Register Your Business). Members can be individuals, companies, or foreign persons.

What is a C corporation?

A C corporation is a state law entity owned by shareholders, governed by directors and officers, and taxed at the entity level. A corporation can issue multiple classes of stock, which is what makes option pools and priced rounds straightforward.

What is a nonprofit corporation?

A nonprofit corporation is a state law entity formed for a charitable, educational, religious or scientific purpose, with no owners and no distributable profit. Exemption under section 501(c)(3) is a separate IRS application, not a consequence of incorporating (SBA, Choose a Business Structure).

Does an LLC or a C corporation give better liability protection?

Neither entity offers better liability protection for a normal operating business. The SBA describes LLCs as protecting owners "from personal liability in most instances" and corporations as offering "the strongest protection to its owners," but both produce the same basic shield.

Behavior breaks that shield, not entity type. The U.S. Supreme Court stated the rule in *United States v. Bestfoods*, 524 U.S. 51 (1998): "the corporate veil may be pierced and the shareholder held liable for the corporation's conduct when, inter alia, the corporate form would otherwise be misused to accomplish certain wrongful purposes, most notably fraud, on the shareholder's behalf" (Legal Information Institute).

Four habits protect you more than any entity choice: a separate bank account, adequate capitalization, signing contracts in the entity's name, and staying in good standing.

How are LLCs, C corporations and nonprofits taxed?

The three entities sit in three tax worlds: pass-through by default, entity-level tax with a second layer on dividends, and exemption on exempt-purpose activity.

Pass-through taxation means profit is reported on the owners' personal returns and taxed once at individual rates. Active business earnings are also generally hit by self-employment tax, which the IRS describes as 12.4% for Social Security up to an annual wage base that changes each year plus 2.9% for Medicare on all net earnings, 15.3% combined (IRS Topic 554). Owners may also deduct up to 20% of qualified business income, made permanent by the 2025 law (IRS, Business Tax Provisions).

Double taxation means corporate profit is taxed at the entity level and again when distributed as dividends. C corporations "figure their tax by multiplying taxable income by 21%" (IRS Publication 542, rev. January 2024). The second layer lands lighter than it sounds, because salaries and expenses are deductible and many small C corporations never declare a dividend.

Deadlines follow a formula, not a date: partnership and S corporation returns are due the 15th day of the 3rd month after the tax year ends, C corporation returns the 4th month (IRS Publication 509).

A 501(c)(3) must be "organized and operated exclusively for exempt purposes" with no part of its net earnings inuring "to the benefit of any private shareholder or individual" (IRS, Exemption Requirements).

Is an S corporation a business structure or a tax election?

An S corporation is a federal tax election, not a business structure. Since 2021 our team has served more than 500 companies, and the correction I make most often is that nobody chooses between an LLC and an S corp.

Eligibility is narrow. An entity must be a domestic corporation with no more than 100 shareholders and one class of stock, and shareholders "may be individuals, certain trusts, and estates" but "may not be partnerships, corporations or non-resident alien shareholders" (IRS, S Corporations).

An LLC does not need to file Form 8832 first. The Form 2553 instructions say an eligible entity electing "doesn't need to file Form 8832," and the window is "no more than 2 months and 15 days after the beginning of the tax year the election is to take effect" (IRS, Form 2553 instructions). Those same instructions set out relief for late elections, so a missed window is not automatically the end of it.

The election is not free money. Officers who perform services are employees, and the corporation "must determine and report an appropriate and reasonable salary" (IRS, S Corporation Officers). Founders usually revisit the election with a CPA, or with our team, once profit runs well past a defensible salary.

Why do venture investors want a Delaware C corporation?

Venture investors converge on Delaware C corporations by market convention, not legal requirement, and three mechanical reasons hold it in place.

Stock structure is the first. A corporation authorizes preferred stock in a form every investor's counsel has read a thousand times, while an LLC requires custom drafting each round.

Section 1202 is the second. Qualified small business stock has to be "stock in a C corporation" acquired at original issue, and the thresholds turn on the issue date. The corporation's aggregate gross assets cannot exceed $50,000,000 at and immediately after issuance for older stock, or $75,000,000 for stock issued after July 4, 2025. Stock acquired after that date also gets a tiered gain exclusion at three, four and five years and a per-issuer cap of $15,000,000, indexed for inflation in later years, where earlier stock works off a five year holding period and a $10,000,000 cap (26 U.S.C. 1202). Read the section as it stands when the stock is actually issued.

Investor reporting is the third. An LLC taxed as a partnership pushes a Schedule K-1 to every investor and can create multi-state filings, and it can send unrelated business taxable income to tax-exempt limited partners, which those investors are structured to avoid.

What does each business structure cost to run each year?

Annual carrying cost, not the formation fee, determines affordability. Registered agent, franchise tax, a separate return, and payroll under an S election repeat yearly. The table compares the three entities on those obligations.

Use an LLC if keeping that column short matters most, and a corporation if investor benefits outweigh the extra filings.

State numbers vary. Delaware charges LLCs $300 a year due 1 June, and non-exempt domestic corporations a $50 annual report fee plus franchise tax starting at a $175 minimum under the authorized shares method, due 1 March (Delaware Division of Corporations). California charges $800 a year on "every LLC that is doing business or organized in California" (California Franchise Tax Board). New York requires an LLC to publish notice in two newspapers and file a Certificate of Publication within 120 days (NY Department of State).

Nonprofits carry their own. The Form 1023 series goes to Pay.gov with a user fee, currently $600 for Form 1023 and $275 for Form 1023-EZ, amounts the IRS calls "subject to change" (IRS, Form 1023 User Fee, updated June 28, 2026). Missing the Form 990 filing three years running triggers automatic revocation (IRS, Automatic Revocation).

Can a non-U.S. resident own an LLC or a C corporation?

A non-U.S. resident can own a U.S. LLC or a U.S. C corporation, but cannot be a shareholder in an S corporation. The Internal Revenue Code restricts S corporation shareholders and imposes no equivalent restriction on LLC members or C corporation stock.

Getting an EIN does not require a Social Security number or an ITIN. International applicants "enter 'foreign' or N/A on line 7b if the responsible party doesn't have and is ineligible to obtain an SSN or ITIN," then apply by phone or fax (IRS, Form SS-4 instructions, rev. December 2025). It is one of the most common questions our international clients ask.

An ITIN is a different instrument. An ITIN is "a 9-digit number the IRS issues" to people ineligible for an SSN, and owning a company does not by itself require one (IRS, ITIN).

What does a non-resident owner have to file?

Three filings follow foreign ownership.

1. Form 5472: A disregarded entity wholly owned by a foreign person files a pro forma Form 1120 with Form 5472 attached, under a $25,000 penalty (IRS, Form 5472 instructions).
2. Section 1446 withholding: An LLC taxed as a partnership withholds on effectively connected income allocable to a foreign partner. The rate tracks the top statutory rate rather than a fixed number: "the highest rate of tax specified in IRC 11(b)" for corporate partners, 21% today, and the highest rate under IRC 1 for everyone else, 37% today (IRS, Partnership Withholding).
3. NRA withholding: "Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%" unless a treaty applies (IRS, NRA Withholding).

Blugency was built in 2021 around this gap, helping founders abroad get an entity, an EIN, and a filing calendar on one platform, from anywhere.

When should you convert an LLC to a C corporation?

Conversion usually gets forced by a priced round or an acquisition conversation, not by revenue hitting a round number. Delaware "allows for the conversion of one entity type to another entity type," covering corporations, LLCs, LPs, LLPs and statutory trusts (Delaware Division of Corporations).

Three costs make early conversion a bad trade. Converting "may result in tax consequences and unintended dissolution" (SBA). Electing corporate classification is treated as a deemed contribution of assets for stock, and for a multi-member LLC the partnership is then treated as liquidating, which can create tax where no cash moved. And an LLC that changes classification generally "can't elect again to change its classification during the 60 months after the effective date of the election" (IRS Publication 3402).

The pattern I see most often is founders who converted too early, paying for a Delaware C corporation and payroll a year before any investor asked. Picking wrong is recoverable. Paying for it early is just expense.

Which business structure is right for you?

Here is the order I work through with founders. Each question eliminates options rather than weighing them, and the answers below are general patterns, not a recommendation for your situation.

1. Does anyone own this and profit from it? If no, and the purpose is charitable, educational or religious, the nonprofit corporation is the route, and organizations "must notify the Service within 27 months from the date of their formation" to be treated as exempt from formation (IRS, Recognition of Exemption). Stop here.
2. Are you raising institutional venture capital within about 24 months? If yes, a C corporation is the path of least resistance, Delaware the default. Stop here.
3. Is any owner a non-U.S. resident? If yes, the S election is off the table. That leaves an LLC or a C corporation, and the international filings above belong in the comparison.
4. Is this mostly you and your income, with profits you take out? An LLC is where most founders in that position start, and the S election is worth pricing once profit consistently exceeds a defensible salary.
5. Are you retaining profits to fund growth? That is where the flat 21% corporate rate starts to look attractive without investors, and it is worth modeling both ways before filing anything.
6. Everything else: an LLC where you operate, money kept separate, structure revisited annually.

Most founders overthink the first question and underthink the annual cost. For a second opinion, schedule a meeting or contact us.

Blugency is not a law firm and does not provide legal advice, so treat this article as general information and review your specific situation with a qualified attorney or CPA.