LLC vs S corp vs C corp: which one is right for your business?

Most first-time founders frame this as a choice between three kinds of company. It's really a choice between two, plus a tax election. An LLC and a corporation are what you form with your state. An S corporation is a way of being taxed that either one can choose, if it qualifies.

That distinction clears up most of the confusion, because it means you don't have to get the tax decision right on day one. You form the entity that fits your plans, and you elect S corporation status later, once the numbers justify it.

The three options side by side

The LLC: simple, flexible, taxed once

By default the IRS doesn't tax an LLC as an entity. A single-member LLC is "disregarded," so its profit goes straight onto your personal return. An LLC with two or more members is taxed as a partnership: it files an information return and each member pays tax on their share.

That keeps things simple and avoids double taxation. The catch is self-employment tax. All of an LLC owner's share of profit is subject to it, at 15.3%: 12.4% for Social Security on earnings up to $184,500 in 2026, plus 2.9% for Medicare on everything.^⁠[3],[4] That's on top of income tax.

Two things soften it. Half of the self-employment tax is deductible,^⁠[3] and most LLC owners can also take the qualified business income deduction, worth up to 20% of their business income,^⁠[9] which the 2025 tax act made permanent.^⁠[11]

LLCs are also flexible about ownership. Members can be people, companies or foreign residents, and the operating agreement can split profits however the members agree.

The S corporation: the same company, paid differently

S corporation status is an election made with IRS Form 2553. A corporation can make it, and so can an LLC. Profit still passes through to the owners' returns, so there is no corporate tax. What changes is how the owners who work in the business are paid.

An S corp must pay each working owner a reasonable salary through payroll, with payroll taxes withheld and paid like any other employee. Profit left over after that salary can be paid out as distributions, and distributions are not subject to self-employment or payroll tax. That gap is where the savings come from.

The rules are strict. An S corp can have no more than 100 shareholders. They must be individuals, certain trusts or estates, and cannot be partnerships, corporations or nonresident aliens. And it can have only one class of stock. That last rule makes an S corp a poor fit for raising venture capital, which relies on preferred stock.

The election also brings costs: a payroll service, a separate tax return (Form 1120-S), and in some states extra tax. Our guide to when to elect S corp status works through where the break-even sits.

The C corporation: built for investors

A C corporation is taxed as its own entity, at a flat 21% federal rate. When it pays profits out to shareholders as dividends, they pay tax again, at 0%, 15% or 20% for qualified dividends depending on their income. That's the "double taxation" people warn about.

Founders choose it anyway for three reasons.

• Investors expect it. Venture capital deals use preferred stock, multiple investors and investment funds as shareholders. A C corporation handles all of that, and most investors want a Delaware C corp specifically.
• Stock options are simple. Employee option plans are built for corporations. Equity in an LLC is possible but awkward and expensive to set up.
• Qualified small business stock. Shareholders in a qualifying C corp can exclude some or all of their gain when they sell. For stock issued after July 4, 2025, the exclusion is 50% after three years, 75% after four and 100% after five, up to the greater of $15 million or ten times the shareholder's basis, for companies with gross assets of $75 million or less when the stock is issued.

For a company that plans to reinvest its profit and eventually sell, double taxation often never bites, because no dividends are paid along the way.

A worked example at $100,000 of profit

Here is the self-employment and payroll tax side of the picture for one owner with $100,000 of profit in 2026. It leaves out income tax, which depends on the rest of your situation, so treat it as a comparison of the structures, not a tax bill.

• LLC, default tax. Self-employment tax applies to 92.35% of the profit, so $92,350 × 15.3% = about $14,130.
• S corp, $60,000 salary. Payroll taxes on the salary, employer and employee halves together, come to $60,000 × 15.3% = $9,180. The other $40,000 is paid as a distribution with no payroll tax. That's about $4,950 less than the LLC, before the cost of running payroll and the extra return.
• C corp, all profit paid out. The company pays 21%, or $21,000. If it then pays the remaining $79,000 as a qualified dividend taxed at 15%, the owner pays another $11,850. That's why a C corp suits companies that reinvest, not owners who take everything out.

The S corp saving grows with profit, as long as your salary stays reasonable for the work. At $40,000 of profit with a $35,000 salary, the saving would be small enough for the extra costs to wipe it out.

State taxes can change the math

Federal tax is only part of the picture. States tax these structures differently, and a few tilt the decision.

California is the clearest example. Every LLC pays the $800 annual tax, and LLCs with $250,000 or more of California income pay an extra LLC fee on top, starting at $900 a year. An S corporation in California pays 1.5% of its net income, with the same $800 minimum. So a California owner weighing an S corp election has to set that 1.5% against the payroll tax saving.

Other states have their own quirks, from franchise taxes based on revenue to cities that don't recognize S corporation status at all. Before you decide, ask an accountant in your state to run the numbers for your profit level, not just the federal ones.

How to choose

Work through these in order.

1. Will you raise money from venture capital investors, now or within a year or two? Form a Delaware C corporation. Converting later is possible but costs legal fees and sometimes tax.
2. Do you plan to grant stock options to employees? A C corporation, for the same reasons.
3. Is any owner a nonresident alien? An S corp is off the table. Choose an LLC or a C corporation.
4. Otherwise, form an LLC. It's the cheapest and simplest to run, and it keeps your options open.
5. Once profit is steady and well above a reasonable salary, look at electing S corp taxation for the LLC.

Changing your mind later

None of these choices is permanent, but some are cheaper to undo than others.

Electing S corp status, or dropping it, is a tax filing, not a new company. An LLC that has elected S corp status can revoke it, though it generally has to wait five years before electing again.

Converting an LLC into a C corporation is common when a business starts to raise money. Most states allow a statutory conversion, and lawyers do it routinely, but it costs legal fees and can trigger tax if the LLC has built up value. If you know you will raise money, starting as a C corporation is cleaner.

Going the other way, from a C corporation back to an LLC, is usually expensive in tax, because the corporation is treated as selling its assets. Avoid forming a C corporation "just in case."

What it costs to form and run each one

Formation costs are similar: your state's filing fee, which our guide to starting an LLC lists by state, plus a registered agent if you use one. A formation service such as ZenBusiness can form either an LLC or a corporation.

Running costs differ more. A default LLC needs bookkeeping and a personal tax return with a schedule for the business. An S corp adds payroll and its own return. A C corporation adds its own return, board resolutions, and, in Delaware, an annual franchise tax and report. Budget for an accountant from the first year if you choose either corporation route.

The bottom line

Start with the question of money. If outside investors are part of the plan, form a C corporation and don't look back. If they aren't, form an LLC, keep clean books from day one, and revisit the S corp election with an accountant once the business earns a steady profit. It's the lowest-cost path that still leaves every option open.