LLC vs. Corporation: Fundraising Issues to Consider
Entrepreneurs should consider forming an LLC if they have a business partner because it can provide limited liability protection, clarify ownership and management roles, and offer a structured way to handle disputes and profits.
Starts at $0 + state fees and only takes 5-10 minutes
Last Updated: March 30, 2026
Starting a new company with a business partner is an exciting time, but it’s also a time with many important responsibilities. The partners need to come up with a name for their new business venture, create a business plan to help guide their development process, and figure out what type of products or services they want to sell.
In addition, the partners also need to make an important decision about their business entity structure. Should an entrepreneur form a limited liability company (LLC) if they have a business partner? What are the other options? This guide walks through those essential questions.
First off, it’s important to outline what an LLC is. A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds. LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations, too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues the LLC, the owners’ personal assets are not at risk.
The other two most common options for a business with multiple owners are to operate as a general partnership or to form a corporation. The general partnership is a casual, no-frills business entity that doesn’t require any formation or maintenance tasks. All the owners need to do is start conducting business, and they’re automatically part of a general partnership.
The general partnership is obviously quite convenient. However, it certainly has its limitations. To start with, the government does not consider a general partnership to be a distinct legal entity from its owners. Instead, the general partnership is treated legally as an extension of its owners’ personalities. In fact, the general partnership doesn’t even have its own legal name — it operates under the personal names of its owners.
The big problem with a general partnership is that the owners don’t receive any personal asset protection like they would with an LLC or corporation. That means that if the business is sued, its creditors can pursue the owners’ personal possessions, like their houses, cars, personal bank accounts, and so on. Clearly, this is a situation that should be avoided at all costs, so it’s generally not recommended to operate as a general partnership.
How about the corporation? Corporations do receive personal asset protection, and like the LLC, they also have unique business names. The biggest advantage of the corporation, as opposed to the LLC, is that a corporation can issue stock, which means that the corporation has far greater expansion potential than an LLC does.
In addition, the corporation is centuries old, while the LLC has only been around for a few decades. This means that there is more precedent in the court systems regarding how corporations should be treated legally, and that predictability is another positive aspect of corporations.
On the other hand, corporations have more complex formation and maintenance requirements than LLCs do. Corporations have a rigid managerial structure that must be followed strictly, with a board of directors who oversee big-picture matters and officers who handle the daily details. They also require extensive upkeep, like holding regular meetings for its directors as well as its shareholders, and keeping detailed meeting minutes for those meetings.
In addition, while an LLC has several options for taxation models, the corporation only has two (the C corp and the S corp). The C corporation is subject to “double taxation,” which means that profits are taxed at 21% on the corporate level, and that same money is taxed again when each shareholder pays taxes on their dividends.
As for the S corp, it’s a similar tax structure to the LLC’s default option, but there are many restrictions on S corp eligibility that exclude many corporations from using this option. To qualify for S corp taxation, the business can’t have more than 100 shareholders, and every shareholder must be a United States citizen or resident.
Ultimately, a guide like this can’t answer this question for every individual business. What’s best for one business team won’t be right for another. Whether some partners form an LLC or a corporation, they’ll receive personal asset protection, which is often considered a much better option than simply operating as a general partnership.
At this point, many partners will be choosing between a corporation and an LLC. A general rule of thumb when choosing between these business structures is that most small businesses choose the LLC, whereas larger businesses with ambitious expansion plans turn to the corporation.
The LLC is much simpler to form and operate than a corporation; there are typically fewer fees involved, and there is a less formal structure to adhere to when it comes to management. Additionally, the way an LLC provides taxation options to its owners can save many businesses a considerable amount of money.
However, corporations are much better entities when it comes to securing outside investments, because the vast majority of investors prefer stock. It’s not unheard of for an LLC to attract investors, but it is highly uncommon nonetheless.
For most readers of this blog, the LLC might be the right choice. ZenBusiness’s guide on how to start an LLC can walk entrepreneurs through the process. Plus, if the owners change their minds down the line, they can convert from an LLC into a corporation (and vice versa, for that matter).
If entrepreneurs are looking for assistance with their formation without breaking the bank, hiring a business formation service can be a big help. ZenBusiness’s LLC formation services start at $0 plus state fees. The best LLC services make it easy to start a business without the hassle.
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FAQs
The best time for entrepreneurs to start an LLC is before they begin conducting business. While it is entirely legally acceptable to operate a business as a sole proprietorship or general partnership before forming an LLC, doing so subjects the business owners to a number of risks that LLCs don’t have to worry about.
For example, informal business structures don’t have limited liability protection, so any lawsuit filed against the business can include the owner’s personal assets as well as the business assets.
Using an online LLC service removes much of the hassle from the business formation process. With these services, all an entrepreneur needs to do is provide the service with the name, location, and industry the business operates in, along with some info about themselves and their registered agent.
The service then creates the company’s Articles of Organization and files them with the state to create the new LLC.
Absolutely. There are quite a few reputable companies offering LLC formation services these days, including ZenBusiness and several others. These incorporation services can all help entrepreneurs set up compliant businesses with minimal hassle.
Potentially, but it depends on the state and whether the business hires the service as its registered agent. In some states, hiring a business formation service can keep the owners’ personal information off the public record (provided the owner doesn’t serve as their own registered agent). But other states require the owners to list their personal information regardless of whether they hire a service or a registered agent.
This is an impossible question to answer in an across-the-board manner, as each business type has its own advantages and disadvantages. That said, the LLC is typically the more suitable option for small businesses and solo entrepreneurs, while the corporation is usually a better fit for large companies. For more info, check out ZenBusiness’s complete comparison guide between LLCs and corporations.
The answer to this question lies in an entrepreneur’s personal preferences, but here are some general pointers. An attorney will cost the most by a mile, but also provides expertise that isn’t available with the other options. The DIY route is free but can require quite a bit of legwork and offers no assurance that the process is being completed correctly.
Using an LLC service means the business will be formed by professionals who know what they’re doing, and it costs significantly less than hiring a lawyer. This “best of both worlds” attribute is what makes LLC services a great option for many entrepreneurs.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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