LLC vs. C Corp vs. S Corp – Which is The Best Business Structure

Deciding between an LLC vs. C Corp vs. S Corp can be one of the most important decisions you make when operating a business. 

Choose the wrong structure, and you could pay more in taxes, take on unnecessary legal risks, or limit your ability to grow the company.

Each structure comes with unique tax rules and liability protections.

Understanding these differences can help you choose the right structure to minimize taxes, protect your finances, and build a strong foundation for future growth. 

In this article, we will break down the pros, cons, and ideal use cases for each business type so you can confidently decide whether a Limited Liability Company (LLC) vs. C Corp vs. S Corp is the right fit for your goals.

How to Choose the Best Business Structure (LLC vs. C Corp vs. S Corp)

Choosing between an LLC vs. C Corp vs. S Corp is about making a wise long-term decision that aligns with your business’s goals, growth stage, and financial strategy. 

To make the best choice, consider the following factors:

Lowest Tax Liability 

Choosing the best business structure can reduce how much you owe the IRS. 

Each entity type is taxed differently, and the wrong choice could cost you an excess amount in unnecessary taxes.

For example, LLCs offer pass-through taxation, which means the business does not pay taxes directly. 

Instead, profits are taxed on the owner’s personal return. 

This can avoid double taxation and be efficient for small businesses with average profits.

S Corporations go a step further by allowing business owners to take a salary and take remaining profits as distributions, which are not subject to self-employment tax, potentially saving a significant amount in taxes annually.

In contrast, C Corporations are taxed separately from their owners.

The business pays corporate income tax at the entity level, and the owner pays individual income tax on any wages or dividends they receive.

This double taxation can be a disadvantage unless you reinvest profits into the business.

Best Legal Protection 

Legal protection is another important factor to consider, especially for businesses in high-risk industries.

Choosing the proper business structure can protect your personal assets, such as your home, car, and savings, from business lawsuits and debts.

Both, LLCs and C Corporations may offer strong personal liability protection.

S Corporations also offer liability protection, but their effectiveness depends on state laws and whether the business is classified as an LLC or a corporation.

In general, all of these structures help separate your personal assets from your business. However, some may offer greater protection than others.

For instance, corporations offer the strongest form of liability protection, whereas this protection is “limited” for LLCs.

Business Stage 

Your current business phase can also influence which structure is best for you.

Startups or side hustles

For startups or side hustles, an LLC can be a beneficial structure.

It can be easy to set up, inexpensive to maintain, and offers flexibility, making it ideal for businesses with low revenue and minimal legal risks.

As your income grows, you can convert the LLC into an S Corp or C Corp.

Established businesses

For established businesses making six or seven figures annually, transitioning to an S Corporation can lead to substantial tax savings, making it a financially smart move.

A C Corporation might be beneficial if you plan to reinvest earnings or seek venture capital.

If you start a solo consulting business, an LLC could work well for your first 1–2 years.

However, once you earn over $100,000, electing S Corp status could significantly reduce your tax burden.

On the other hand, if you are building a startup that seeks venture capital, investors often prefer a C Corp.

Focusing on key factors like tax savings, legal protection, and growth stage allows you to make informed decisions that save money and support your long-term vision.

Consulting a CPA or legal advisor can help you run the numbers and weigh the pros and cons.

Benefits of Using an LLC

While S Corporations and C Corporations have tax advantages, LLCs offer tax flexibility that can be highly beneficial.

This can be especially true for small business owners, freelancers, and growing entrepreneurs who want to retain more earnings.

Here is how LLCs differentiate themselves from S Corps and C Corps in terms of tax benefits:

Pass-Through Taxation

As mentioned in the previous section, an LLC is typically treated as a pass-through entity by default. 

This means the business itself does not pay corporate income tax. 

Instead, any profits or losses are reported directly on the owner’s personal tax return. 

This structure prevents the double taxation that C Corporations face, where income is taxed at the corporate level and again when dividends are distributed to shareholders.

No Salary Requirement

Owners of LLCs are not required to pay themselves a salary, unless they operate as an S Corporation or C Corporation.

Instead, they simply take owner draws or distributions from the business profits.

This eliminates the administrative burden and costs associated with running payroll and complying with other requirements enforced onto the other entity options.

However, these draws do not exempt them from self-employment tax. 

By default, all net profits of an LLC are subject to a 15.3% self-employment tax up to annual limits, if taxed as a disregarded entity. 

To reduce self-employment tax obligations, LLC owners can choose to be taxed as an S Corporation. 

This structure offers business owners flexibility in how they are taxed over time.

Optional S Corp Tax Election for Tax Savings

One of the most significant advantages of an LLC is that it can elect to be taxed as an S Corporation without becoming one legally.

This gives you the best of both worlds: the simplicity and legal flexibility of an LLC combined with the payroll tax savings of an S Corp.

When you earn more than $50,000 in profit, electing S Corp tax treatment can save you thousands in self-employment taxes.

Flexibility to Change Tax Classification Later

LLCs can be taxed as sole proprietorships, partnerships, S Corporations, or C Corporations.

This choice allows business owners to select the most tax-efficient structure as their businesses grow.

You can adjust your tax strategy as your income increases without changing your business structure.

If your goal is to legally minimize taxes, maximize deductions, and evolve your plan over time, starting with an LLC can be a wise tax decision.

For tailored advice on whether your LLC should remain a pass-through entity or elect S Corporation status, it is advisable to consult a tax planner specializing in business entities.

Benefits of Using an S Corp

S Corporations can be a popular choice for small business owners who want to reduce their self-employment taxes while maintaining pass-through taxation.

Though S Corps have more rules and administrative requirements than an LLC, the potential tax savings can be significant, especially when the business becomes profitable.

Let’s take a look at how an S Corp structure compares to LLCs and C Corps when it comes to tax benefits.

Reduce Self-Employment Tax with Reasonable Salary

One key tax advantage of an S Corp is the potential savings on self-employment taxes.

As an S Corp owner-employee, you should pay yourself a reasonable salary for your work.

This salary is subject to payroll taxes (Social Security and Medicare).

Any remaining profits can be taken as distributions, which are not subject to self-employment tax.

For example, if your business earns $100,000 in profit, and you pay yourself a reasonable salary of $40,000, that salary will be subject to payroll tax.

The remaining $60,000 in profit can be distributed to you without incurring the 15.3% self-employment tax, potentially saving you over $9,000 in taxes.

However, the IRS requires your salary to be “reasonable” based on industry standards.

A reasonable salary is the amount you would pay someone else to perform the same job you do for your business. 

In other words, it should reflect fair market compensation based on your role, skills, experience, time commitment, and geographic location.

Failing to meet this requirement may result in an audit and penalties.

Deductions

Operating as an S Corporation allows the business to deduct many fringe benefits it provides to employees as business expenses.

These benefits include health insurance, retirement contributions, and other perks. 

These deductions can reduce the company’s taxable income, thereby helping to lower the overall tax burden.

However, the tax treatment of these benefits changes if the employee is a shareholder who owns more than 2% of the S Corporation’s stock. 

In these cases, the IRS considers these shareholder-employees to be self-employed for certain benefit purposes.

Avoid Double Taxation

While C Corporations pay a flat federal tax rate of 21% on profits and then face additional taxes when those profits are distributed to owners, S Corps avoid corporate tax altogether.

All earnings go directly to shareholders and are taxed once on their personal tax returns at their individual income tax rate.

This can result in a much lower effective tax rate, especially for small to mid-sized businesses with few shareholders.

Eligibility for the 20% QBI Deduction

Thanks to the 2017 Tax Cuts and Jobs Act, qualifying S Corp owners may be eligible for the Qualified Business Income (QBI) deduction.

The QBI allows S Corp owners to reduce taxable income by up to 20% of qualified business earnings, depending on income level and business type.

This deduction can save eligible business owners thousands of dollars each year.

Drawbacks to Keep in Mind

While S Corporations offer substantial tax benefits, there are some limitations and compliance rules to consider:

S Corps should have 100 or fewer shareholders, and all should be U.S. citizens or resident aliens.

As mentioned, the IRS requires that shareholder-employees be paid a reasonable salary before taking distributions.

You should run payroll, withhold taxes, file quarterly reports, and issue W-2s to yourself and any employees.

S Corps should also file certain forms each year, which can increase administrative costs.

Benefits of Using a C Corp

C Corporations are often associated with large enterprises, but they can also provide tax benefits for small and mid-sized businesses, especially those looking to reinvest profits or attract investors.

While C Corporations have the potential for double taxation, the advantages can outweigh this downside in certain situations.

Here is how the C Corp compares to LLCs and S Corps regarding tax benefits.

Flat 21% Corporate Tax Rate

One appealing feature of a C Corporation is its flat federal corporate tax rate of 21% on net income.

Unlike pass-through entities, which are taxed at individual rates (up to 37% in 2025), a C Corp’s profits are taxed at this flat rate no matter how much the business earns.

Operating as a C Corp could reduce your initial tax liability on business income if you are in a high individual tax bracket.

For example, if your business earns $200,000 in profit and you are in the 37% tax bracket as an individual, you would owe $74,000 in federal taxes as a pass-through entity.

But if that same income is taxed at the corporate level as a C Corp, you would pay $42,000, saving $32,000 in the current year before distributions are considered.

Reinvesting Profits

If you plan to reinvest a large portion of your profits back into the business on things like equipment, marketing, product development, or expansion, a C Corp may be the most tax-efficient choice.

Unlike S Corps and LLCs, which pass all profits through to the owners, a C Corporation can retain earnings without triggering a tax bill for the owners.

This allows the business to grow its cash reserves, scale more quickly, or prepare for strategic investments without the owner paying personal income tax on retained earnings.

Potential to Avoid Self-Employment Tax

C Corp owners are considered employees of the corporation, not self-employed individuals.

This means C Corp profits are not subject to self-employment tax; only wages paid to shareholders are.

While you will still need to run payroll and pay standard employment taxes (Social Security and Medicare), this structure limits payroll tax exposure by paying a reasonable salary and retaining the rest within the company.

For example, take a salary of $80,000. You will only pay employment tax on that amount, not on your business’s full profit.

Ability to Offer Benefits Tax-Free

C Corporations can offer greater flexibility than S Corporations in providing tax-free benefits to owner-employees.

Some benefits that are fully deductible for the business and non-taxable to the employee (including owner-shareholders) include:

• Group health insurance premiums
• Life insurance (up to $50,000 in coverage)
• Dental and vision benefits
• Education assistance (up to $5,250 per year)
• Adoption assistance
• Health Reimbursement Arrangements (HRAs)

This makes C Corps ideal for businesses with a small team or family-owned operations where the owner wants to provide benefits and reduce their taxable income.

Qualified Small Business Stock (QSBS) Exclusion

If you plan to build and sell a company for a significant profit, structuring it as a C Corporation could allow you to exclude up to $10 million in capital gains from federal taxes under the Section 1202 QSBS exclusion.

Section 1202 allows shareholders to exclude 50%, 75%, or 100% of the capital gains from the sale of Qualified Small Business Stock (QSBS), depending on when the stock was acquired.

The 100% exclusion applies to stock acquired after September 27, 2010.

Suppose you invest in a startup C Corporation and receive $1 million in QSBS. Ten years later, you sell that stock for $15 million. 

If the stock qualifies under Section 1202 and was acquired after 2010, you may be able to exclude up to $10 million in capital gains from your federal taxes.

Section 1202 encourages startup founders, angel investors, and early-stage employees to choose C Corporations, giving a competitive advantage over LLCs and S Corporations when planning for long-term capital gains.

In addition to the 21% flat corporate tax rate and the opportunity to reinvest profits, Section 1202 can be helpful for those anticipating significant financial events, such as an acquisition. 

If you aim to build and sell a company for a large profit, structuring it as a C Corporation early can lead to tax savings.

Always consult a tax advisor before engaging with QSBS to ensure compliance.

The Downside: Taxable Dividends and Double Taxation

The main downside of a C Corp is double taxation.

First, the business pays corporate income tax (21%) on its profits.

Then, if those profits are distributed as dividends to shareholders, the shareholders pay taxes again, typically at rates between 15% and 20% for qualified dividends.

However, many C Corp owners avoid or delay this second layer of tax by reinvesting profits or strategically timing distributions, especially when tax planning for major purchases or growth.

In some cases, reasonable salaries can be used to reduce taxable income at the corporate level while providing income to shareholders, helping to limit dividends altogether.

That said, C Corps can be more complex to manage and have strict IRS filing requirements, including corporate tax returns (Form 1120), separate bookkeeping, and dividend reporting.

If you are considering the C Corp structure or want to explore how switching could reduce your tax burden, consult a tax advisor or CPA with entity planning experience.

Bottom Line

Choosing your business structure is a big decision that can impact your operation for years.

Consider what kind of business you want to start. What are your long-term goals?

Asking these questions can help you determine which structure fits your plans best.

Whether an LLC vs. C-Corp vs. S-Corp, each has its benefits and rules.

Talking to a tax professional can guide you through the setup process, help with paperwork, and ensure you meet all legal requirements.

Once your business structure is established, it will be your responsibility to follow your business plan and work towards growing your business.