Choosing the right business structure is one of the most important decisions any entrepreneur—especially international founders—will make when setting up a company in the United States.
But one of the most confusing areas for many new business owners is the difference between pass-through entities and corporations.
While both structures offer legal protections and business credibility, they operate very differently when it comes to taxation, ownership rules, compliance, and growth potential.
In fact, the lines between these options often blur—especially with LLCs being able to elect corporate taxation, and S Corporations combining elements of both structures.
In this article, MyUSAService breaks down the nuanced—but critical—differences between pass-through entities and corporations so you can make a confident, informed decision for your business.
What Is a Pass-Through Entity vs. a Corporation?
A pass-through entity is a business structure where the income “passes through” the business and is reported directly on the owner’s or owners’ personal tax returns. These structures don’t pay federal income tax at the entity level. Instead, the tax burden is passed on to the individuals.
The most common pass-through entities include:
Partnerships
Limited Liability Companies (LLCs) taxed as disregarded entities or partnerships
S Corporations (a specific IRS designation)
In contrast, a corporation—especially a C Corporation—is a separate legal and taxable entity. The business pays corporate income taxes on its profits, and then shareholders pay taxes again on any dividends they receive, creating what’s often referred to as double taxation.
Many new business owners—especially those outside the U.S.—struggle to understand these distinctions, particularly because some structures (like LLCs) can opt into different tax classifications.
Taxation: The Core Difference
The biggest—and perhaps most misunderstood—difference between these business types is how they’re taxed. Pass-through entities utilize pass-through taxation, which means that the business itself doesn’t pay income tax. Instead, profits and losses flow through to the owner(s), who report them on their personal tax returns. This is usually more tax-efficient for small businesses and startups in their early stages.
C Corporations are taxed at a flat federal corporate tax rate of 21%, and any dividends paid to shareholders are taxed again on their personal returns. This “double taxation” can be a drawback. However, C Corps can retain earnings in the business for reinvestment without triggering additional tax at the owner level.
In contrast, LLCs and S Corps avoid double taxation, but they may come with other limitations that make them less suitable for certain types of businesses or long-term strategies.
Administrative Burden and Ongoing Requirements
Corporations tend to require more formal management and documentation:
Annual shareholder meetings
A board of directors
Corporate bylaws and meeting minutes
Annual reports and compliance filings with the state
By contrast, pass-through entities like LLCs have far fewer formalities. While they still need to be registered with the state and maintain good standing, they don’t require a board, meetings, or as much paperwork. This simplicity makes them a preferred choice for solopreneurs, freelancers, and international founders looking for a straightforward business structure.
Ownership and Eligibility Restrictions
A common point of confusion is who can own each type of entity.
LLCs offer the most flexibility. They can be owned by individuals, multiple people, other businesses, or even foreign nationals.
S Corporations have strict requirements:
Must have 100 or fewer shareholders
Shareholders must be U.S. citizens or permanent residents
Cannot be owned by other corporations or partnerships
Because of these restrictions, non-resident aliens cannot own an S Corporation. This makes S Corps a non-option for many international entrepreneurs, who are better suited to LLCs or C Corporations depending on their goals.
Profit Distribution Flexibility
Pass-through entities, especially LLCs, allow for more flexible profit allocation.
LLCs can distribute profits in ways that do not match ownership percentages, so long as the details are clearly outlined in the operating agreement.
Corporations, however, must distribute profits based on share ownership. If you own 25% of the company’s stock, you receive 25% of the dividends—no exceptions.
This flexibility in LLCs can be beneficial when partners contribute different levels of time, capital, or expertise and want compensation to reflect those realities.
Investor Readiness and Fundraising Potential
When it comes to raising money from investors, C Corporations—especially Delaware C Corps—are usually the preferred vehicle.
C Corporations can issue multiple classes of stock, grant stock options, and provide equity incentives to attract top talent and capital.
LLCs typically don’t offer stock and have a more complex ownership structure, making them less attractive to venture capitalists and institutional investors.
While LLCs can convert into C Corporations down the road, that transition can be costly and involve tax consequences. If raising capital is a key part of your business plan, forming a C Corp from the beginning is often the best strategy.
Self-Employment Taxes and Owner Compensation
One of the lesser-known but crucial differences is how business owners pay themselves—and how those earnings are taxed. Pass-through entities like LLCs and S Corporations have specific tax structures that impact owner compensation.
LLC owners pay self-employment tax (currently 15.3%) on their share of profits. This covers Social Security and Medicare and can be a significant expense.
S Corporation owners can split their income between a “reasonable salary” (subject to payroll tax) and distributions (which are not). This setup allows for significant tax savings but must be carefully structured to avoid IRS scrutiny.
C Corporation owners are taxed as employees on their salaries. Additional income, like dividends, is taxed separately.
Understanding these compensation mechanisms is key to optimizing your tax liability—especially for high-earning owners.
Conclusion
Understanding the often-unclear differences between U.S. LLC vs. Corporation, pass-through entities, and other business structures isn’t just an academic exercise—it can impact everything from your tax bill to your ability to raise money and scale your business.
To summarize:
Choose an LLC for simplicity, flexible profit sharing, and pass-through tax treatment.
Consider an S Corporation for tax-efficient compensation—if you qualify as a U.S. citizen or resident.
Go with a C Corporation if you’re looking to attract investors, retain earnings, or offer stock options.
At MyUSAService, we specialize in guiding both U.S. and international entrepreneurs through entity formation, tax planning, and compliance. Whether you’re forming a U.S. LLC, converting to a Delaware C Corp, or exploring S Corp election, our experts will help you make the right move for your business—right from the start.
