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LLC vs S Corp vs C Corp: How to Choose a Business Structure for Taxes
LLC vs S corp vs C corp comes down to who pays the income tax and how owner pay is taxed. A default LLC passes profit to its members, who owe self-employment tax on all of it. An S corporation passes profit through too, but only the salary carries payroll tax. A C corporation pays a flat 21% itself, and shareholders pay again on dividends.
The LLC vs S corp vs C corp question mixes two different things: the entity you form under state law and the box the IRS puts it in. This guide separates them, puts the three federal tax treatments side by side in one table, runs the same $200,000 of profit through all three, and lists the facts that usually decide the choice. The two-way comparisons go deeper on each pair: S corp vs LLC and S corp vs C corp.
An LLC is a state entity; S corp and C corp are federal tax classifications
The IRS describes an LLC as “a business structure allowed by state statute” and says most states do not restrict who can be a member or how many members there are (IRS LLC page). Federal tax law then classifies it. Unless it elects otherwise, a domestic LLC is a partnership if it has two or more members and is disregarded as separate from its owner if it has one (Treas. Reg. 301.7701-3(b)(1)). A single-member LLC reports on Schedule C like a sole proprietor; a multi-member LLC files Form 1065 like any partnership.
The LLC can leave that default two ways. Filing Form 8832 makes it an association taxable as a corporation, which means a C corporation unless it also elects S status (see Form 8832). Filing a timely Form 2553 makes it an S corporation, and the regulation treats that filing as the corporate election too, so no Form 8832 is needed (Treas. Reg. 301.7701-3(c)(1)(v)(C); details in can an LLC be taxed as an S corp). A business incorporated under a state corporation statute is a corporation for federal tax without any election (Treas. Reg. 301.7701-2(b)(1)), and its only choice is C or S.
LLC vs S corp vs C corp: the comparison table
| LLC (default) | S corporation | C corporation | |
|---|---|---|---|
| Return filed | Schedule C with the owner’s Form 1040 (one member) or Form 1065 with a Schedule K-1 for each member (two or more) | Form 1120-S with a Schedule K-1 for each shareholder | Form 1120 |
| Who pays the income tax | The members, on their share of profit, whether or not it is paid out | The shareholders, on their pro rata share, whether or not it is paid out | The corporation, at 21%; shareholders pay again on dividends |
| Tax on the owner’s pay | No salary. Self-employment tax of 12.4% up to the $184,500 wage base plus 2.9% on 92.35% of net earnings | Reasonable salary on a W-2, 7.65% withheld and 7.65% paid by the corporation. Distributions carry no employment tax | Salary on a W-2 with the same payroll taxes. Dividends carry no payroll tax but have already been taxed at 21% |
| QBI deduction (up to 20%) | Yes, on net profit, subject to the section 199A limits | Yes, on K-1 profit. The salary is not qualified business income | No. Section 199A applies to taxpayers other than corporations, and dividends are not business income |
| Section 1202 exclusion on a sale | No. Qualified small business stock must be stock in a C corporation | No, for the same reason | Possible: original-issue stock, gross assets of $75,000,000 or less, held 3 years or more for stock acquired after July 4, 2025 |
| Limits on owners | None in federal tax law; the IRS notes most states do not restrict who can be a member | 100 shareholders at most, only individuals, estates, certain trusts and certain exempt organizations, no nonresident aliens, one class of stock | None of the S corporation limits apply |
Three rows deserve a closer look. On who pays, a partnership “as such shall not be subject to the income tax” (IRC 701) and an S corporation “shall not be subject to the taxes imposed by this chapter” (IRC 1363(a)); the owners pick up the income on their K-1s “whether or not distributed” (Partner's K-1 instructions; Form 1120-S instructions). A C corporation pays “21 percent of taxable income” (IRC 11(b)), and its shareholders are taxed on dividends, which for qualified dividends means the capital gains rates (IRC 1(h)(11)).
On owner pay, an S corporation or C corporation officer who works in the business is an employee by definition (IRC 3121(d)(1)), so pay runs through payroll. A default LLC member is not an employee of the LLC; the owner pays self-employment tax on net earnings instead (Schedule SE instructions). The rate is 12.4% for Social Security and 2.9% for Medicare (IRC 1401), applied to 92.35% of net earnings (IRC 1402(a)(12)), with the Social Security part stopping at $184,500 in 2026 (Publication 15). On section 1202, only stock in a C corporation qualifies (IRC 1202(c)(1)), which is the one place a C corporation has a tax feature the others cannot copy.
The same $200,000 of profit under all three (an illustration)
Round numbers, one owner who files single, no other income, no state tax, 2026 federal figures. The owner takes a $90,000 salary in the S corporation and C corporation columns; the C corporation pays out everything left after tax as a dividend. Health insurance, retirement contributions, unemployment tax and the cost of running payroll are left out.
| LLC (default) | S corporation | C corporation | |
|---|---|---|---|
| Owner salary | None | $90,000 | $90,000 |
| Self-employment tax or payroll taxes (both halves) | $28,234 | $13,770 | $13,770 |
| Corporate income tax at 21% | None | None | $21,654 |
| Profit passed through or paid out | $200,000 on Schedule C | $103,115 on Schedule K-1 | $81,461 as a dividend |
| QBI deduction | $33,957 | $20,623 | None |
| Owner’s federal income tax | $25,196 | $30,132 | $23,189 ($10,970 on wages, $12,219 on the dividend) |
| Total federal tax | $53,430 | $43,902 | $58,613 |
The S corporation column wins by $9,528 over the default LLC because $103,115 of profit escapes the 15.3% employment tax and only the $90,000 salary carries it. That gap shrinks if a reasonable salary has to be higher, which what is a reasonable salary for an S corp owner covers, and it is partly offset by the smaller QBI deduction, since salary is not qualified business income (IRC 199A(c)(4)). The C corporation column loses because $103,115 is taxed twice: 21% inside the corporation, then 15% when the $81,461 that is left comes out. If the corporation kept that cash instead, its total for the year would have been $46,394, but the $81,461 would still be inside the corporation with the second tax waiting.
How to tell which one you are right now
The IRS puts it simply: “Your form of business determines which income tax return form you have to file” (IRS business structures page). Read it backwards. Schedule C on your Form 1040 means a sole proprietorship or a disregarded single-member LLC (Schedule C instructions). Form 1065 means a partnership, which includes a multi-member LLC that never elected. Form 1120-S means an S corporation, and the IRS confirms an accepted S election with a CP261 notice it tells you to keep in your permanent records (IRS, CP261). Form 1120 means a C corporation, including an LLC that elected corporate status (Form 1120 instructions).
Two structures without an LLC wrapper land in the same boxes. A sole proprietorship is taxed exactly like a single-member LLC, and a general partnership exactly like a multi-member LLC; the state-law entity changes nothing on the federal return.
When each one tends to fit
Default LLC: low or uneven profit, or one owner who wants no payroll
With no payroll to run and no separate return for a single member, the default is the cheapest to operate. The self-employment tax bill is the trade-off, and it grows with profit. Once profit reliably exceeds what a reasonable salary would be, the S election starts to pay for its overhead; the break-even is worked through in S corp vs LLC.
S corporation: profitable, owner-run, with cash coming out
The S corporation fits a business that distributes its profit to working owners. The price is a payroll setup, a Form 1120-S every year, and the eligibility limits in IRC 1361(b): no more than 100 shareholders, no partnership or corporate shareholders, no nonresident aliens, and one class of stock. That last rule rules out the preferred shares outside investors usually want.
C corporation: reinvested profit, outside investors, a possible section 1202 exit
A C corporation fits when profit stays in the business, because retained earnings are taxed once at 21% until they come out. It is also the only structure whose stock can qualify for the section 1202 exclusion: for stock acquired after July 4, 2025, 50% of the gain is excluded after 3 years, 75% after 4 and 100% after 5, capped at the greater of $15,000,000 or ten times basis per issuer, and the corporation's gross assets must not exceed $75,000,000 (IRC 1202(a)(1)(B), (a)(5), (b)(4)(B) and (d)(1)). Service fields such as health, law, consulting and financial services are excluded (IRC 1202(e)(3)).
Changing later is easier in one direction
An LLC can move up to S or C status by filing a form. Moving back down is where the costs sit. A C corporation that elects S status faces the built-in gains tax on appreciated assets sold within five years (IRC 1374), and an S corporation that revokes or loses its election cannot elect again for five tax years without IRS consent (IRC 1362(g)). Both conversions are covered in S corp vs C corp.
Anthony leads sales at Business Executive Group, a national HR services firm that runs payroll for owner-employees of S corporations and C corporations. Tax planning work is done by licensed tax professionals at BEG's tax partner.
Sources: 26 CFR 301.7701-2, business entities; definitions; 26 CFR 301.7701-3, classification of certain business entities; 26 U.S.C. 11, tax imposed on corporations; 26 U.S.C. 1(h)(11), dividends taxed as net capital gain; 26 U.S.C. 701, partners, not partnership, subject to tax; 26 U.S.C. 1361, S corporation defined; 26 U.S.C. 1363, effect of election on corporation; 26 U.S.C. 1366, pass-thru of items to shareholders; 26 U.S.C. 1374, tax on built-in gains; 26 U.S.C. 1362, election; revocation; termination; 26 U.S.C. 1401 and 1402, self-employment tax; 26 U.S.C. 3121, definitions (officers as employees); 26 U.S.C. 199A, qualified business income; 26 U.S.C. 1202, partial exclusion for gain from certain small business stock; 26 U.S.C. 1411, net investment income tax; IRS, Limited liability company (LLC) (reviewed May 29, 2026); IRS, Business structures (reviewed June 28, 2026); IRS, Understanding your CP261 notice; IRS, Instructions for Form 1120-S (2025); IRS, Instructions for Form 1120 (2025); IRS, Partner’s Instructions for Schedule K-1 (Form 1065) (2025); IRS, Instructions for Schedule C (Form 1040) (2025); IRS, Instructions for Schedule SE (Form 1040) (2025); IRS, Publication 15 (2026), Employer’s Tax Guide; IRS, Rev. Proc. 2025-32, 2026 inflation adjustments. Figures and rules checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.
LLC vs S corp vs C corp questions
Is an LLC an S corp or a C corp?
Neither, by default. An LLC is a state-law entity. For federal tax it is a disregarded entity with one member or a partnership with two or more, unless it elects otherwise. It becomes a C corporation by filing Form 8832 and an S corporation by filing Form 2553, which counts as the corporate election as well.
Which pays the least tax: LLC, S corp or C corp?
It depends on profit, salary and what you do with the cash. In the $200,000 illustration above, the S corporation owed the least federal tax, the default LLC was next, and the C corporation owed the most once its profit came out as a dividend. A C corporation that keeps its profit pays only the 21% corporate tax that year, at the cost of a second tax later.
Does a single-member LLC pay self-employment tax?
Yes, under the default classification. The owner reports the profit on Schedule C and pays self-employment tax on 92.35% of net earnings: 12.4% up to the Social Security wage base, $184,500 for 2026, plus 2.9% with no cap. Half of the tax is deductible in figuring adjusted gross income.
Can an LLC be taxed as a C corporation?
Yes. Form 8832 lets an eligible entity, including an LLC, elect to be classified as an association taxable as a corporation. The election can take effect up to 75 days before or 12 months after filing, and after a change the entity generally cannot change again for 60 months.
How do I know which one my business is right now?
Look at the return you file: Schedule C means a sole proprietorship or disregarded LLC, Form 1065 means a partnership, Form 1120-S means an S corporation and Form 1120 means a C corporation. An S election that the IRS accepted comes with a CP261 notice, which the IRS asks you to keep in your permanent records.
Is a sole proprietorship taxed the same as a single-member LLC?
For federal income tax, yes. Both report on Schedule C and pay self-employment tax on the profit. The difference is state law: an LLC is a separate legal entity formed under a state statute, and a single-member LLC is treated as separate from its owner for employment taxes.
Can I start as an LLC and switch later?
Yes. An LLC can elect S status with Form 2553 by the 15th day of the third month of the year it should start, or file Form 8832 for C corporation treatment. Changing a corporation back the other way is harder: a C corporation that elects S status carries a five-year built-in gains period, and a terminated S election cannot be made again for five tax years without IRS consent.
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