LLC vs S-Corp vs C-Corp (2026) — Which Business Structure to Choose

There are really two questions here, often confused. The first is "what legal entity should I form?" — usually LLC, sometimes corporation. The second is "how should it be taxed?" — disregarded entity, partnership, S-Corp, or C-Corp. The IRS lets LLCs choose any of the four tax treatments. So an "LLC vs S-Corp" comparison is usually really "LLC taxed as a sole proprietor vs LLC that has elected S-Corp taxation."

Quick comparison

LLC (default tax treatment)

Legal entity: created by state filing (Articles of Organization)
Default federal tax: "disregarded entity" if single-member, "partnership" if multi-member
Owner pays personal income tax + 15.3% self-employment tax on profits
Most flexible: any number of members, foreign owners allowed, any class structure
Annual paperwork: minimal (state annual report + federal Form 1040 Schedule C or Form 1065)

LLC with S-Corp election

Same legal entity (LLC) — just elects S-Corp tax treatment via IRS Form 2553
Owner becomes employee of own LLC; pays "reasonable salary" subject to payroll tax
Remaining profits flow as distributions, NOT subject to self-employment tax
Restrictions: max 100 shareholders, only U.S. residents/citizens, only one class of stock
Annual paperwork: payroll filings, Form 1120-S, K-1s, plus state requirements

C-Corp

Legal entity: created by state filing (Articles of Incorporation), separate from owners
Federal tax: corporate income tax (21% federal flat rate), then dividends taxed again to shareholders
No restrictions on shareholders (foreign investors, multiple share classes, unlimited shareholders)
Required for VC funding, stock options, going public
Annual paperwork: most extensive (board minutes, shareholder meetings, 1120, K-1 to shareholders, etc.)

When the LLC default makes sense (most small businesses)

For most solo founders and small partnerships, the default LLC tax treatment is exactly right. You report business income on your personal Form 1040 (Schedule C for single-member, K-1 for multi-member), pay normal income tax + 15.3% self-employment tax on profits, and file your state's annual report. No payroll, no separate corporate return, no quarterly board minutes.

The "default LLC" is the right answer when: you're a solo founder, your annual profit is under ~$40–50K (S-Corp savings don't exceed setup + payroll costs at this level), you don't plan to raise venture capital, and you value administrative simplicity.

When the S-Corp election makes sense

The S-Corp election's main benefit is splitting your LLC income between (a) a "reasonable salary" subject to payroll taxes (~15.3% combined) and (b) distributions that are NOT subject to self-employment tax. Above roughly $50K of profit, the saved self-employment tax on distributions can exceed the cost of running payroll.

Mechanically: your LLC pays you a W-2 salary that's "reasonable for the work you do" (the IRS scrutinizes this), withholds payroll taxes, and any profit above the salary flows to you as a distribution. You save self-employment tax on the distribution portion only.

When C-Corp makes sense

C-Corp is the right structure if any of the following are true: you plan to raise venture capital (VCs require Delaware C-Corp), you want to issue stock options to employees, you have foreign investors (S-Corps prohibit non-residents), you need multiple share classes (preferred + common), or you plan an IPO.

C-Corps face "double taxation" — the corporation pays corporate income tax on profits (21% federal), then shareholders pay personal income tax on dividends. For typical small businesses, this is worse than pass-through treatment. But C-Corp also unlocks the QSBS (Qualified Small Business Stock) exclusion, which can exempt up to $10M of capital gains on sale. For high-growth startups expecting to exit, the QSBS benefit alone can be worth the double-taxation downside.

How to decide: a flowchart in words

Are you raising venture capital or planning to? → Delaware C-Corp
Are you a solo founder or small partnership making under $40–50K profit? → LLC, default tax
Are you a solo founder making $50K+ profit? → LLC + S-Corp election (talk to a CPA first)
Are you a multi-member LLC with passive investors? → LLC, partnership tax treatment
Do you have foreign owners? → LLC, default tax (S-Corp not allowed)
Do you want multiple share classes / preferred equity? → C-Corp

Common mistakes

Electing S-Corp too early

Many founders elect S-Corp the moment they form an LLC, before knowing their profit level. If profits stay below $50K, the added payroll, bookkeeping, and Form 1120-S filing costs typically exceed the SE tax savings — you net out worse. Wait until you have at least one full year of profit data before electing.

Forming a C-Corp without VC funding

Some founders form C-Corps because they "sound more legitimate." For a small business not raising venture capital, this is a mistake — you incur double taxation, more paperwork, and stricter compliance with no offsetting benefit. Form an LLC; convert to C-Corp later if you actually raise VC (the conversion is straightforward).

Paying yourself an unreasonably low salary as an S-Corp

The IRS requires S-Corp owner-employees to pay themselves "reasonable compensation" before taking distributions. Owners who try to maximize the SE tax savings by setting an artificially low salary (e.g., $20K when the role is worth $80K) face IRS audits, back payroll taxes, penalties, and interest. The "reasonable" benchmark is what you'd pay an outside hire to do the same work.

State-level differences

The state where you form your LLC affects the corporate-side analysis differently:

California: $800 minimum franchise tax applies to LLCs taxed as pass-through AND those electing S-Corp. The 1.5% S-Corp tax also applies to S-Corp electing LLCs in CA.
Tennessee: Even pass-through LLCs owe Franchise (0.25% net worth) + Excise (6.5% net earnings) tax. The S-Corp election doesn't reduce these.
Texas: No personal income tax. The franchise tax only kicks in above $2.47M revenue. So both LLC and S-Corp face minimal state tax on small operations.
Wyoming, Nevada, South Dakota: No state income tax. Both LLC and S-Corp election work cleanly.
New York: NYC adds Unincorporated Business Tax (UBT) on top of state tax for LLCs operating in NYC.

Don’t want to file yourself? Northwest Registered Agent files your LLC for $39 + state fee and acts as your registered agent the first year free.

Frequently asked questions

Is an LLC taxed differently than an S-Corp?

By default, yes. A default LLC is taxed as a sole proprietorship (single-member) or partnership (multi-member) — all profits subject to self-employment tax. An LLC that has elected S-Corp treatment via IRS Form 2553 splits income between a W-2 salary (subject to payroll tax) and distributions (NOT subject to self-employment tax). The "LLC" is still the legal entity in both cases — only the tax treatment changes.

When should an LLC elect S-Corp taxation?

Roughly when net profit consistently exceeds $50,000 per year. Below that, the added cost of payroll processing, accounting, and a separate Form 1120-S typically wipes out the self-employment tax savings. Above $50K, the savings scale up. Above ~$200K, gains plateau because of the Social Security wage base cap. Run the math with a CPA before electing — the breakeven point varies by state and personal situation.

Can a single-member LLC elect S-Corp?

Yes. A single-member LLC files IRS Form 2553 to elect S-Corp tax treatment. The IRS will then treat the LLC as an S-Corp for federal tax — owner becomes employee of own LLC, runs payroll, pays themselves "reasonable salary," takes distributions on remaining profit. State law still treats it as an LLC.

What is "reasonable salary" for an S-Corp owner?

The IRS requires S-Corp owner-employees to pay themselves what they'd pay an outside person to do the same work — based on their role, experience, hours worked, industry norms, and revenue. There's no fixed formula. Common benchmarks: 30–60% of total profit goes to salary, the rest to distributions, depending on whether the owner is mostly working in the business or mostly investing capital. Get a CPA's opinion in writing — it's the most-audited area of S-Corp compliance.

Do I need a C-Corp to raise venture capital?

In practice, yes. Almost all U.S. venture capital firms require Delaware C-Corporation structure for portfolio companies because of: (1) preferred equity classes that LLCs/S-Corps can't cleanly issue, (2) Delaware Court of Chancery case law on shareholder rights, (3) institutional investor LP agreements that prohibit pass-through investments, and (4) clear path to IPO. If you're raising VC, form a Delaware C-Corp from day one or convert before fundraising.

Can I convert my LLC to a C-Corp later?

Yes. The most common path is a "statutory conversion" (where the state allows it) or a "merger conversion" (forming a new C-Corp and merging the LLC into it). Both are routine and handled by startup law firms. Tax consequences depend on the timing and structure. Do it before fundraising to avoid valuation/timing issues with VCs.

What's the cheapest entity to maintain?

A default-tax LLC in a low-cost state. Wyoming LLC: ~$110/year (annual report + RA). New Mexico LLC: ~$50/year (no annual report, just RA). Missouri LLC: $0/year (no annual report, no RA cost if you serve as own). S-Corps add payroll, bookkeeping, and Form 1120-S costs (~$1,500–$5,000/year). C-Corps add corporate compliance and Form 1120 (~$2,000–$10,000/year).

Are LLC and Inc. the same thing?

No. "Inc." (or "Corp.") refers to a corporation — either C-Corp or S-Corp. "LLC" refers to a Limited Liability Company. Both provide personal liability protection. They differ in: governance (LLCs use Operating Agreements, corporations use bylaws + board minutes), taxation (LLCs are flexible, corporations default to C-Corp tax), and ownership rules (LLCs allow foreign owners and multiple share classes; S-Corps don't). For most small U.S. businesses, LLC is the right choice.