LLC vs S-Corp vs C-Corp — Which Business Structure Is Right for You?

Quick Comparison

Run your numbers through the Business Entity Comparator to see which structure saves the most→

LLC (Limited Liability Company)

What It Is

An LLC combines the liability protection of a corporation with the tax simplicity of a sole proprietorship. It's the most popular structure for small businesses.

Pros

• Simple to set up and maintain — minimal paperwork
• Flexible taxation — default pass-through, but can elect S-Corp taxation
• No ownership restrictions — unlimited members, any nationality
• Operating agreement flexibility — customize profit allocation, management
• Asset protection — personal assets protected from business debts

Cons

• Self-employment tax on all profits — 15.3% on first ~$160K, 2.9% above
• Limited ability to raise capital — can't issue stock
• Less credibility with some investors
• State-specific annual fees — $0 to $800/year (California is $800)

Best For

• Solo businesses and freelancers
• Real estate investing
• Businesses with no immediate plans to seek investment
• Most small businesses earning under $50K-$100K profit

S-Corporation

What It Is

An S-Corp isn't a business type — it's a tax election. You can form as an LLC or corporation, then elect S-Corp status with the IRS.

The key benefit: split income between salary (subject to self-employment tax) and distributions (not subject to SE tax).

The Tax Savings Example

Requirements

• Must pay yourself a "reasonable salary" (IRS scrutinizes low salaries)
• 100 shareholders maximum, all US citizens or residents
• One class of stock only
• Must file annual tax return (Form 1120-S)
• Required to run payroll

Best For

• Businesses with $50K-$400K in annual profit
• Owners who can pay themselves a reasonable salary
• Businesses not seeking outside investment
• Professional service businesses (consultants, doctors, lawyers)

C-Corporation

What It Is

A C-Corp is a separate legal entity that pays its own taxes. This creates "double taxation" — the corporation pays tax on profits, and shareholders pay tax on dividends.

Pros

• Unlimited growth potential — can have unlimited shareholders
• Multiple stock classes — preferred stock for investors
• Investor friendly — VCs and angels prefer C-Corps
• Lower corporate tax rate — 21% federal (vs up to 37% personal)
• Can retain earnings — build cash without personal tax
• Fringe benefits deductible — health insurance, etc.

Cons

• Double taxation — profits taxed at corporate level, dividends taxed again
• Complex compliance — annual meetings, minutes, resolutions
• More expensive — legal, accounting, filing costs higher
• Rigid structure — less flexibility than LLC

Best For

• Businesses seeking venture capital
• Plans to go public (IPO)
• Companies wanting to retain significant earnings
• Large businesses with many shareholders

Decision Tree

Is this a solo or small partnership business?

→ Start with LLC

Is profit exceeding $50K-$70K and you're paying significant SE tax?

→ Elect S-Corp taxation

Are you seeking VC investment or planning to go public?

→ Form C-Corp (or convert)

Do you have foreign investors or more than 100 shareholders?

→ C-Corp required (S-Corp doesn't allow)

The LLC with S-Corp Election (Most Common Path)

Many businesses follow this path:

1. Year 1: Form LLC — simple, cheap, flexible
2. Year 2-3: Profit grows — S-Corp election saves $5K-$20K in SE tax
3. Year 5+: Seek investment — convert to C-Corp if needed

This approach gives flexibility while optimizing taxes at each stage.

Cost Comparison

SBA — Choose Your Business Structure→

Frequently Asked Questions

Can I change my business structure later?

Yes. You can convert an LLC to a corporation, elect S-Corp status, or revoke elections. There may be tax consequences, so consult an accountant before converting.

When should I elect S-Corp status?

Generally when your net self-employment profit exceeds $50,000-$70,000 and the tax savings exceed the additional costs (payroll, tax prep). Below this threshold, the administrative burden often outweighs savings.

Compare business structures with our Business Entity Comparator, calculate startup costs, and explore SBA loan options.