LLC vs S-Corp vs C-Corp

There are two separate questions people conflate when they ask "LLC vs S-Corp." The first is a legal question: what kind of entity should I form with my state? The second is a tax question: how should that entity be taxed? The IRS lets LLCs choose between four tax treatments — disregarded entity, partnership, S-Corp, or C-Corp. So an LLC taxed as an S-Corp is still legally an LLC. When people say "should I form an S-Corp or an LLC," they almost always mean "should my LLC elect S-Corp tax treatment?"

The three structures compared

LLC with default tax treatment

• Legal entity: LLC formed with your state Secretary of State
• Federal tax: "disregarded entity" (single-member) or "partnership" (multi-member)
• All profits subject to 15.3% self-employment tax (12.4% Social Security up to $168,600 wage base + 2.9% Medicare, no cap)
• Simple annual filing: Schedule C (single-member) or Form 1065 + K-1s (multi-member)
• No payroll required, no separate corporate return, no quarterly board minutes
• Foreign owners allowed, any number of members, multiple membership classes

LLC with S-Corp tax election

• Same legal entity (LLC) — elects S-Corp treatment via IRS Form 2553
• Owner becomes W-2 employee of own LLC at a "reasonable salary"
• Salary subject to payroll taxes (~15.3% combined employer + employee)
• Remaining profit flows as distributions — NOT subject to self-employment tax
• Must file Form 1120-S annually + run payroll all year
• Restrictions: max 100 shareholders, only U.S. citizens/permanent residents, one class of stock

C-Corporation

• Separate legal entity: Articles of Incorporation filed with state
• Federal tax: 21% flat corporate income tax — then dividends taxed again to shareholders ("double taxation")
• No restrictions on shareholders (foreign investors, unlimited count, multiple share classes)
• Required for venture capital, stock options, going public, QSBS exclusion
• Most administrative overhead: board minutes, shareholder meetings, Form 1120, K-1s
• Best for high-growth companies planning to exit or IPO

The S-Corp tax savings — actual numbers

The S-Corp election saves self-employment tax on the portion of income you take as distributions rather than salary. In 2026, the SE tax rate is 15.3% up to the Social Security wage base ($168,600) and 2.9% above it. Here is what the savings look like at different profit levels:

• $40,000 net profit → reasonable salary ≈ $40,000 → $0 saved (all income must be salary)
• $75,000 net profit → reasonable salary ≈ $50,000 → $25,000 in distributions → ~$3,825 SE tax saved
• $100,000 net profit → reasonable salary ≈ $55,000–$65,000 → $35,000–$45,000 distributions → ~$5,355–$6,885 saved
• $150,000 net profit → reasonable salary ≈ $70,000–$80,000 → $70,000–$80,000 distributions → ~$10,710–$12,240 saved
• $200,000 net profit → reasonable salary ≈ $80,000–$100,000 → $100,000–$120,000 distributions → ~$14,500–$18,360 saved (Medicare surcharge reduces gains above this)

Against those savings, subtract the cost of running an S-Corp: payroll service ($50–$150/month), accountant for Form 1120-S ($500–$2,500/year), and potentially a higher accounting fee for quarterly estimates. Total added overhead: roughly $1,500–$5,000/year depending on your accountant. The net savings only become meaningful above ~$50,000 in profit.

Reasonable salary: the most-audited part of S-Corp compliance

The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" — what they would pay an outside hire to do the same work. Paying yourself $20,000 when the role is worth $90,000 is the single most common reason S-Corp owners get audited. The IRS has won consistently on this in Tax Court, reassessing back payroll taxes plus 25% accuracy penalty plus interest.

What counts as reasonable: industry surveys (BLS, SHRM), comparable job postings, your hours worked, the complexity of your work, and your total revenue. Common benchmarks used by CPAs: pay yourself 40–60% of total profit as salary, take the rest as distributions. If you do specialized work (surgery, engineering, legal) that commands a high market rate, your salary must reflect that rate even if it reduces your distribution savings.

When to elect S-Corp: the timing rules

To elect S-Corp treatment for a full tax year, you must file IRS Form 2553 by March 15 of that year (for calendar-year LLCs). New LLCs have a 75-day window from formation to elect retroactively for the current year. You can also file a late S-Corp election — the IRS grants reasonable-cause relief in most cases, and some CPAs file late elections routinely. Consult a CPA on the exact timing for your situation.

Avoid electing S-Corp in your first year before you know your profit level. If your first year ends with only $30,000 of profit, the S-Corp election costs more than it saves. Many CPAs recommend running as a default LLC for the first full year, measuring actual profit, then electing if the numbers justify it.

When C-Corp makes sense

C-Corp is the right structure if any of these apply: you plan to raise venture capital (VCs require Delaware C-Corp for preferred equity and board governance), you want to issue stock options to employees (ISOs are C-Corp instruments), you have foreign investors (S-Corps prohibit non-residents), you need multiple share classes (preferred + common + restricted), or you plan an IPO or acquisition at scale.

The QSBS (Qualified Small Business Stock) exclusion is a powerful C-Corp benefit often overlooked. Under IRC Section 1202, shareholders who hold C-Corp stock for more than 5 years can exclude up to $10 million of capital gains from federal tax on sale — potentially worth millions for a successful exit. The company must be a C-Corp at time of issuance and must be under $50 million in assets when the stock is issued. For high-growth startups, QSBS can make the double-taxation cost of a C-Corp worthwhile.

LLC vs S-Corp for specific business types

Freelancers and solo consultants

Default LLC until profit exceeds $50,000. Above that threshold, an S-Corp election becomes worth analyzing. The key variable is how much of your revenue you can classify as distributions versus salary. Service professionals (lawyers, accountants, designers) face tighter scrutiny from the IRS on salary minimums because their personal services are the primary revenue driver.

Real estate investors

Real estate rental income from a passive LLC investment is generally not subject to self-employment tax regardless of structure — so the S-Corp election provides no SE tax benefit for passive rental income. Real estate dealers and developers who actively flip properties do have SE tax exposure and may benefit from an S-Corp. Consult a CPA who specializes in real estate before electing.

E-commerce and product businesses

If your LLC sells physical products, a significant portion of revenue is attributable to inventory, not personal services. This makes it easier to justify a lower salary-to-distribution ratio, increasing S-Corp savings. The S-Corp election is commonly used by e-commerce founders once profit exceeds $60,000–$80,000.

Tech startups seeking investment

A venture-backed company may be asked to use a Delaware corporation, but the choice should follow actual investor and legal requirements. Delaware corporate franchise tax is calculated under corporation-specific methods and should not be confused with the flat $400 yearly tax for Delaware LLCs. Get legal and tax advice before forming or converting.

State-level differences that change the math

• California: $800 minimum franchise tax applies to both default LLCs and S-Corp-electing LLCs. CA also imposes a 1.5% S-Corp tax on net income, partially reducing the SE tax savings.
• Tennessee: Franchise (0.25% net worth) + Excise (6.5% net earnings) taxes apply regardless of S-Corp election — the state does not conform to S-Corp pass-through treatment the same way.
• New York City: adds Unincorporated Business Tax (UBT) on LLCs operating in NYC, which reduces but does not eliminate the benefit of S-Corp election in most cases.
• Texas: no individual income tax; the 2026–2027 franchise-tax no-tax-due threshold is $2.65 million, with information reporting still required. Federal S-corporation treatment does not remove Texas filing obligations.
• Wyoming, Nevada, South Dakota, Florida: No state income tax. S-Corp election provides clean federal savings with no state-level complication.

How to switch from LLC to S-Corp (or back)

Switching from default LLC to S-Corp tax treatment: file IRS Form 2553 (Election by a Small Business Corporation) — this is a tax election, not a state filing. Your legal entity remains an LLC. To elect for the current calendar year, file by March 15. For next year, file any time before December 31. Late elections are possible with reasonable-cause relief.

Revoking the S-Corp election: shareholders owning more than 50% of shares must consent to the revocation in writing. File the revocation statement with the IRS. Once revoked, the LLC reverts to default tax treatment and generally cannot re-elect S-Corp for 5 years. Make sure revocation is the right long-term call before filing.

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.