What is the difference between an LLC and an S-Corp?

An LLC is a business entity type; an S-Corp is a tax election. An LLC can elect S-Corp tax treatment. The key difference: S-Corp owners who work in the business split income between salary (subject to payroll tax) and distributions (not subject to payroll tax), potentially saving thousands in self-employment taxes.

When should I switch from LLC to S-Corp?

Consider S-Corp election when your net self-employment income consistently exceeds $40,000-$50,000+/year. At that point, payroll tax savings typically exceed the additional costs of S-Corp compliance (payroll processing, additional tax filings).

What's the benefit of a C-Corp?

C-Corps have the lowest corporate tax rate (21%), can retain earnings at that rate, offer unlimited shareholders and share classes (attractive to investors), and provide the most flexibility for equity compensation. The downside is double taxation on dividends.

LLC vs. S-Corp vs. C-Corp: Which Business Structure Is Right? (2026)

Choosing the right business structure affects your taxes, personal liability, and operational complexity. Here’s a clear comparison of the most common options.

Business Structures Compared

Feature	Sole Proprietorship	LLC	S-Corp	C-Corp
Personal liability protection	No	Yes	Yes	Yes
Formation filing	None	State filing ($50-$500)	State filing + IRS election	State filing + IRS filing
Tax treatment (default)	Personal return (Schedule C)	Personal return	Personal return	Corporate return (Form 1120)
Double taxation	No	No	No	Yes (corporate + dividend)
Self-employment tax	Yes (all net income)	Yes (all net income)	Only on salary	N/A (payroll tax on wages)
Ownership restrictions	1 owner	Unlimited	100 max, US residents only	Unlimited
Can raise venture capital	Rarely	Possible	Difficult	Yes (preferred structure)
Annual compliance	Low	Low	Medium	High
Best for	Side hustles, freelancers	Small businesses, most startups	Profitable small businesses	VC-funded startups, large companies

Tax Comparison: The Numbers

Self-Employment Tax Savings (S-Corp vs. LLC)

For a business with $120,000 in net profit, owner pays themselves a $60,000 salary:

Structure	Income	Payroll/SE Tax Owed	Income Tax Owed	Additional Costs	Net Tax Savings
Sole Prop/LLC	$120,000	$16,956 (15.3% SE tax on ~$110,700)	~$17,000	$0	—
S-Corp	$120,000	$9,180 (7.65% employer + 7.65% employee on $60K)	~$17,000	$2,000-$3,000 (payroll/compliance)	$4,776-$5,776

The S-Corp saves approximately $5,000/year at this income level.

Self-Employment Tax Savings by Income Level

Net Profit	LLC SE Tax	S-Corp Payroll Tax*	Annual Savings
$40,000	$5,652	$4,590	$1,062
$60,000	$8,478	$5,355	$3,123
$80,000	$11,304	$5,738	$5,566
$100,000	$13,817	$6,885	$6,932
$150,000	$18,870	$8,415	$10,455
$200,000	$22,222	$9,945	$12,277

*Assumes reasonable salary of 50-60% of profits.

C-Corp Double Taxation

Stage	Amount	Tax Rate	Tax Paid
Corporate profit	$100,000	21% (corporate rate)	$21,000
After-tax profit	$79,000	—	—
Dividend to owner	$79,000	15% (qualified dividend)	$11,850
Total tax paid			$32,850 (32.9% effective)
S-Corp comparison	$100,000	~24% (individual rate)	~$24,000

C-Corp double taxation costs $8,850 more in this example.

When Each Structure Makes Sense

Sole Proprietorship

Best When	Not Ideal When
Side hustle earning under $20K	Any significant liability exposure
Testing a business idea	Income exceeding $40K/year
No employees, no partners	Working with clients who require LLC/Corp

LLC

Best When	Not Ideal When
Starting a small business	Seeking VC funding
Need liability protection	Net profit consistently over $50K (consider S-Corp)
Simple, flexible structure	Need multiple share classes
Multiple members/partners

S-Corp (or LLC Taxed as S-Corp)

Best When	Not Ideal When
Net profit over $50K/year	Fewer than 100 shareholders needed
Want to reduce self-employment tax	Non-US shareholders
Owner actively works in business	Plan to go public
Profitable, stable business	Need to retain large earnings at low rate

C-Corp

Best When	Not Ideal When
Raising venture capital	Small service businesses
Planning for IPO	Owner wants to distribute all profits
Need multiple share classes	Want simplicity
Want to retain earnings at 21% rate
International shareholders

The Bottom Line

Start as a sole proprietorship or LLC for simplicity. When net profits consistently exceed $50,000, elect S-Corp tax treatment to save on self-employment taxes—it can save $5,000-$12,000+ per year. C-Corps are primarily for companies seeking outside investment or planning for significant scale. The right structure depends on your income level, growth plans, and willingness to handle additional compliance.