LLC vs S Corp vs C Corp: The Legal and Tax Choice, Separated

An LLC is a legal entity you create under state law. S corporation and C corporation are federal tax classifications the IRS applies to an entity that already exists. They are not three options on one axis, which is why the question feels harder than it is: you are making two decisions, a legal one at the state level and a tax one at the federal level, and you can change the second without disturbing the first.

Once that is separated, most of the confusion dissolves. An LLC can be taxed as a sole proprietorship, a partnership, an S corporation or a C corporation. A corporation formed under state law can be taxed as a C corporation or, by election, as an S corporation. The IRS lays out the menu on its business structures page.

What is the difference in one table?

The IRS publishes the authoritative detail in Publication 3402 on LLC taxation and Publication 542 on corporations, and the SBA has a plainer overview of the state-law side in its guide to choosing a business structure.

How is each one actually taxed?

An LLC by default is invisible to the IRS. A single-member LLC is treated as a disregarded entity and its results land on the owner's personal return. A multi-member LLC is treated as a partnership and files an information return that pushes each member's share out on a K-1. In both cases the entire net profit is generally subject to self-employment tax as well as income tax, whether you took the money out of the business or left it in.

That last clause is the one that catches people. Profit left in the bank account to fund next year's growth is still taxed to you this year.

An S corporation splits the same profit in two. The owner-employee is paid a salary, which carries payroll tax like any other wage, and the remaining profit passes through as a distribution that is not subject to self-employment tax. The salary has to be reasonable for the work performed, which is not a formality: it is the entire mechanism the IRS uses to stop the election from being a way to zero out employment taxes. The rules are set out on the IRS S corporations page, and the election itself is made on Form 2553, which has deadlines.

A C corporation is taxed as its own person. The company pays federal corporate income tax at a flat rate set by statute, and shareholders pay again on dividends when profits are distributed. That is the double taxation everyone mentions, and it is real, but it only bites on distributed profit. Money retained and reinvested is taxed once, at the corporate level, which is why the structure suits companies that are not paying their owners out.

No rate appears above on purpose. Corporate and individual rates, the payroll tax wage bases, and the thresholds around the qualified business income deduction are set by statute and adjusted, and an article that pinned them down would age badly. Look up the current figures at irs.gov for your filing year before you model anything.

Who is allowed to own an S corporation?

This is where the choice is often made for you rather than by you. The S election carries eligibility rules that the LLC and C corporation do not: a cap on the number of shareholders (100 at the time of writing), shareholders limited to US individuals, estates and certain trusts, and only one class of stock. Confirm the current list on the IRS page above, because these are statutory and can move.

The consequences are concrete. A non-resident co-founder disqualifies the election. A venture fund cannot hold shares. A deal structure that gives some investors a liquidation preference creates a second class of stock. If any of those are in your plans within a few years, the S corporation is not a real option and the choice is between an LLC and a C corporation.

When does a C corporation actually make sense?

For most owner-operated small businesses, a C corporation is the wrong answer, and it gets recommended anyway because of how visible the structure is among large companies. It makes genuine sense in four situations.

• You are raising institutional capital. Venture funds expect a Delaware C corporation, and converting later is possible but costly and slow.
• You are retaining most of your profit. If earnings stay inside the business to fund growth rather than reaching the owners, the second layer of tax never triggers and the corporate rate may be lower than the owners' personal rates.
• You want a broad benefits package for owner-employees. Several fringe benefits are treated more favourably for C corporation employees than for substantial owners of pass-through entities.
• You need multiple classes of equity, an employee option pool that behaves the way employees expect, or foreign ownership.

Against that, the costs are real: a corporate return, corporate formalities that courts expect to see observed, losses that are trapped at the company level instead of offsetting your other income, and a conversion out that is far harder than the conversion in.

What does each one cost to run?

The uplift is the reason the S election is not automatically worth taking. It adds payroll, a separate return, and a bookkeeping standard that has to survive scrutiny, so the tax saved has to clear those costs before the election is a gain. The arithmetic of exactly where that break-even sits is the subject of our companion guide on S corp versus LLC taxes, and the two-way comparison in LLC vs S corp covers the liability and paperwork side.

What goes wrong when people choose badly?

Electing S too early. Below a certain profit level the payroll and filing costs exceed the employment tax saved, and you have bought yourself a compliance obligation for nothing.

Setting the salary to whatever saves the most tax. A salary that is implausible for the work being done is the most common way an S corporation attracts attention, and the correction carries back taxes, interest and penalties.

Forming a C corporation for a lifestyle business. Profits you intend to take out get taxed twice, and the losses of the early years are stranded in the company rather than sheltering your other income.

Ignoring the state layer entirely. States do not always follow the federal classification. Several impose franchise taxes, gross receipts taxes, or minimum annual fees that are indifferent to profit, and a few tax S corporations at the entity level anyway. The best federal structure can be the worse total answer in a specific state.

Missing the election deadline. Form 2553 has timing rules, and late relief exists but is not guaranteed. A structure decided in March for a year that began in January is often a decision about next year.

Who can actually advise on this?

Entity choice is a planning question, not a filing question, and the supply is thinner than it looks. Of the 27,281 US accounting firms we profile from their own websites, 1,186 advertise business formation services. Of those, 653 do not advertise tax planning at all.

In other words, most firms that will happily form your entity do not publicly offer the service that decides which entity you want. Formation is paperwork; choosing between these three is modelling. Ask which one you are buying.

How should you actually decide?

1. Start with the legal entity. For nearly everyone that is an LLC, unless you are raising venture capital, in which case it is a corporation.
2. Then ask whether outside investors are coming. If yes, and soon, go straight to a C corporation and stop here.
3. Then look at profit, not revenue. The S election is a function of what is left after you pay yourself and everything else.
4. Then price the compliance. Payroll, an extra return, and better books.
5. Then check your state, which can reverse the federal answer.
6. Then model it once with a professional, and revisit it when profit changes materially. This is not a permanent decision, and treating it as one is why people agonise over it.

What to do next

Write down your expected profit after paying yourself, whether investors are plausible within three years, and which state your business is actually operating in. Those three answers resolve most cases before anyone opens a spreadsheet.

Then take it to someone who does planning rather than only preparation. CPAs near you and accountants near you list the services each firm advertises, so you can filter for the firms that name tax planning before you book a meeting. If the immediate question is deductions rather than structure, small business tax deductions is the better starting point.

Method and caveats

Directory figures come from the AccountingNearYou dataset as of 28 August 2026: 27,281 US accounting firms profiled from their own public websites, of which 1,186 advertise business formation and 5,559 advertise tax planning. A firm counts only where the service appears on the pages we crawled, so these are counts of what firms advertise, not of everything they do. The 757 figure is firms matched to a state licensing record; an unmatched firm is unknown rather than unlicensed.

No tax rate, threshold or deduction percentage appears in this guide, and that is deliberate: corporate and individual rates, payroll tax wage bases and the qualified business income rules are set by statute and adjusted, so confirm every current figure against IRS guidance for your filing year. The shareholder limit and eligibility rules described above are statutory and can also change. This is general information about how US entity classification works, not advice about your business, and entity choice interacts with state law in ways that a national article cannot cover.