Choosing whether your business should be an LLC, S Corporation (S Corp), or C Corporation (C Corp) isn’t just legal structure—it’s a tax decision that can cost you or save you thousands. Understanding LLC vs S Corp vs C Corp is essential if you’re looking to keep more money in the business and lower your tax burden.
In this article, we’ll walk through what each structure means, the pros and cons, and help you decide which entity election makes sense for your situation so you can maximize tax savings.
What’s the Difference? An Overview of LLC, S Corp, and C Corp
- LLC (Limited Liability Company): By default, an LLC is a pass-through entity—profits and losses flow through to the members’ personal tax returns. Single-member LLCs act like sole proprietorships; multi-member LLCs are treated like partnerships. You can also elect to have an LLC taxed as an S Corp or even a C Corp under certain conditions. Wikipedia+2gordonlaw.com+2
- S Corporation: An S Corp is basically a tax election (for eligible corporations or LLCs) that provides pass-through taxation, meaning the entity itself doesn’t pay federal income tax; instead, income/losses are passed to shareholders to report and pay at their individual rates. Small Business Administration+2Wolters Kluwer+2
- C Corporation: A C Corp is a separate entity taxed at the corporate level. The profits are taxed, and then any dividends paid to shareholders are taxed again at individual rates—what’s called “double taxation.” Thomson Reuters Tax+2Wolters Kluwer+2
Why “LLC vs S Corp vs C Corp” Matters for Taxes
The choice of entity election impacts:
- Tax layers (single vs double taxation): S Corps and LLCs (by default) avoid corporate-level taxation; C Corps do not. CBH+2Wolters Kluwer+2
- Self-Employment / Payroll Taxes: As an LLC taxed by default, all profits might be subject to self-employment tax. But with an S Corp election (if qualifying), you can pay yourself a “reasonable salary” and take remaining profits as distributions that aren’t subject to those payroll taxes. That can yield significant savings. CBH+2gordonlaw.com+2
- Loss Deductions & Pass-Through Losses: LLCs and S Corps allow the business’s losses to flow through to owner(s) and offset other income (depending on rules). C Corps generally do not allow losses to offset personal income. Wolters Kluwer+1
- Growth, Investors, and Stock Options: If you plan to scale, take on investors, issue multiple classes of stock, or go public, C Corp structure often gives more flexibility. S Corps have limitations (e.g., number of shareholders, one class of stock). Wolters Kluwer+1
When an LLC Election Is Enough
Choose an LLC when:
- Your profits are moderate, and the simplicity and flexibility are more important than squeezing out every tax dollar.
- You don’t want complex payroll, board meetings, multiple stock classes, or high compliance costs.
- You’re okay with all profits being subject to self-employment tax (or don’t have enough profit that the savings from an S Corp election would justify the extra compliance).
When an S Corp Election Is Worth It
You should consider electing S Corp status (for your corporation or your LLC) if:
- Your business has steady profits large enough that paying yourself a “reasonable salary” + distributions results in payroll tax savings.
- You want pass-through taxation but also want to reduce self-employment taxes.
- You meet the eligibility rules (e.g. ≤100 shareholders, U.S. citizens/residents, one class of stock). Wolters Kluwer+1
When a C Corp Makes Sense
A C Corp could be the right choice if:
- You want to reinvest profits instead of distributing them, to fund growth or expansion.
- You plan to seek outside investment or venture capital that expects a C Corp structure.
- You need to issue preferred stock or have multiple classes of stock.
- You’re preparing for an IPO or want to sell shares publicly.
Key Trade-Offs & Considerations
| Factor | LLC (default) | LLC taxed as S Corp / S Corp | C Corp |
|---|---|---|---|
| Double taxation | No | No | Yes (profits taxed + dividends taxed) |
| Self-employment / payroll taxes | Profits = self-employment tax | Salary + distributions → tax saving if profits high | Owner salary treated as wage + dividends taxed |
| Flexibility & compliance | High flexibility; fewer formalities | More compliance: payroll, documentation | Most formal: corporate governance, reports, etc. |
| Investor appeal & stock options | Limited | Moderate (some limitations) | High flexibility; ideal for outside capital |
| Loss deductions/pass-through losses | Generally yes | Yes | Losses stay at corp unless rules allow otherwise |
How to Decide: Practical Steps
- Calculate your current profit after expenses.
- Estimate how much “reasonable salary” you’d need under an S Corp election.
- Compare what your tax bill would be under:
- LLC default (sole proprietor / partnership)
- S Corp election
- C Corp status
- Factor in extra costs: payroll taxes, bookkeeping, compliance, state taxes.
- Consider growth: do you need investors, scalability, stock?
Example Scenario
Suppose your business nets $150,000 after expenses:
- As an LLC taxed by default: you pay self-employment taxes on close to the full amount (minus deductions).
- If you elect S Corp status, you might pay yourself a salary of $80,000 and take $70,000 as distributions. Only the salary is subject to payroll taxes. The distributions aren’t taxed for self-employment, saving a chunk in taxes.
- If you go C Corp: profits are taxed at corporate rate, then if you distribute dividends, those are taxed again. Could be worth it if you reinvest most profits and don’t distribute much.
Bottom Line: Choose Based on Your Profits and Plans
If you’re trying to optimize for tax savings, the LLC vs S Corp vs C Corp decision should hinge on your bottom line, your long-term growth plans, and how much complexity you’re willing to manage. There’s no one-size-fits-all answer—but by running the numbers and knowing your options, you’ll be in a much better position to make a decision that saves you money.
