LLC vs S-Corp vs C-Corp

Choose the wrong business entity and you'll overpay taxes by $15,000–$85,000 annually depending on your revenue and profit margin. The right structure saves money, limits liability, and positions your business for growth.

The Direct Answer: Which Entity Type Wins?
Entity Comparison: Structure, Liability, and Formalities
The Tax Question: How Each Entity Is Taxed
LLC Tax Elections and the Missing 40-60% Savings
S-Corp Mechanics: How to Save on Self-Employment Tax
C-Corp When It Makes Sense
New England State-Specific Rules and Incentives
Case Study: A $2M Revenue Service Business Choosing Between Structures
Step-by-Step Implementation Checklist
Frequently Asked Questions
Key Takeaways

Entity Comparison: Structure, Liability, and Formalities

Before taxes, understand the structure. Each entity type offers different liability protection and compliance requirements.

Limited Liability Company (LLC): An LLC is a pass-through entity that separates personal assets from business liability. You form it at the state level, and profits flow to your personal tax return (unless you elect corporate taxation). Formation generally involves filing Articles of Organization with the state and paying a state filing fee. An operating agreement is strongly recommended. State compliance requirements vary and may include annual reports, state filings, and business or occupational licenses.

S-Corporation (S-Corp): An S corporation is a tax election, not a separate state-law entity. A corporation that wants S status files Form 2553, and LLCs may elect corporate tax treatment and then S-corporation treatment. S corporations are pass-through entities: income, deductions, gains, losses, and credits pass through to shareholders, and the business files Form 1120-S with Schedule K-1 reporting. An owner who works in the business must receive reasonable compensation, and wages are subject to payroll-tax rules.

C-Corporation (C-Corp): A C-Corp is a separate entity with its own tax identification number and tax return (Form 1120). It's subject to corporate income tax at both federal and state levels. Profits distributed to owners as dividends face double taxation—once at the corporate level and again when shareholders receive distributions. C-Corps require a Board of Directors, bylaws, and compliance with corporate formalities (minutes, resolutions, annual meetings).

Liability Protection Across All Three

LLCs and corporations are generally used to separate business liabilities from owners' personal assets, but that protection depends on proper formation, legal separation, and ongoing compliance.

Compliance Burden and Hidden Costs

| Entity Type | Formation Cost | Annual Compliance | Accounting Cost | | --- | --- | --- | --- | | LLC | $50–$300 | $150–$500 | $500–$1,200 | | S-Corp | $150–$500 | $500–$1,500 | $1,200–$2,500 | | C-Corp | $200–$500 | $800–$2,000 | $1,500–$3,000 |

The extra compliance cost of an S-Corp is worth it only if the tax savings exceed $2,500–$4,000 annually.

The Tax Question: How Each Entity Is Taxed

LLC Taxation: By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. Business income passes through to the owner or owners and is reported on their personal returns.

S-Corp Taxation: An S-Corp requires you to document a "reasonable salary" for the services you perform. The IRS scrutinizes whether your salary is truly reasonable—it should match what someone else would earn in that role. Once reasonable W-2 compensation is paid, the remaining profit is generally treated as S-corporation distributions, not wages. Those distributions are not subject to self-employment tax.

Example: A consulting business with $250,000 net profit. As an LLC, the owner pays $38,250 in self-employment tax. As an S-Corp, if the owner takes an $80,000 W-2 salary and $170,000 as distributions, self-employment tax is $12,240—a savings of $26,010 annually.

C-Corp Taxation: A C corporation is a separate tax-paying entity that files Form 1120 and pays tax at the corporate level. The federal corporate tax rate is 21%. If profits are later distributed to shareholders as dividends, those dividends may be taxed again at the shareholder level, creating double taxation.

C-Corps make sense only in narrow scenarios: (1) you're retaining profits to fund growth and won't distribute them for years, (2) your business qualifies for special tax credits, or (3) you're planning an acquisition where the acquirer prefers C-Corp structure.

LLC Tax Elections and the Missing 40–60% Savings

An LLC has three possible tax treatments:

Option 1: Default (No Election) — Single-member LLC taxed as sole proprietorship; Multi-member LLC taxed as partnership. All profits subject to self-employment tax.

Option 2: S-Corp Election (Form 2553) — Must take reasonable W-2 salary. Remaining profit distributed as dividends (no self-employment tax). Savings: 15.3% on distributed profits above reasonable salary.

Option 3: C-Corp Election (Form 8832) — LLC taxed as C-Corp. Subject to corporate income tax (21% federal). Shareholders pay tax on dividends. Rarely used; triggers double taxation.

When to Elect S-Corp Taxation for Your LLC

S-Corp election may become worthwhile when: net profit exceeds $60,000–$80,000 annually; you have discretionary income above your reasonable salary; your business is stable.

Savings calculation: If your net profit is $150,000 and your reasonable salary is $70,000, the remaining $80,000 avoids self-employment tax. You save 15.3% × $80,000 = $12,240 annually. Minus the extra compliance cost ($2,000–$3,000), you net $9,000+ in savings.

S-Corp Mechanics: How to Save on Self-Employment Tax

Determining Reasonable Compensation

The IRS defines reasonable compensation as "the amount paid for services rendered, and should be based on the fair market value for services rendered." Courts have consistently upheld that S-Corp owners can't pay themselves $30,000 and distribute $200,000 to avoid tax.

How to document reasonable salary:

Use BLS wage data — Visit bls.gov, find your industry and job role, note the median wage
Benchmark against peers — Survey industry salary surveys or CPA reports
Document your responsibilities — Write a job description for yourself, noting hours and tasks
Keep contemporaneous records — Document your salary decision when the S-Corp is formed or when you change compensation

Key Takeaways

LLCs are the simplest and most flexible structure but default taxation means you pay self-employment tax on all profits.
S-Corp election can save $10,000–$30,000+ annually on self-employment tax once net profit exceeds ~$60,000–$80,000.
C-Corps are rarely the best choice for small businesses but serve specific scenarios (retained earnings, R&D credits, acquisition targets).
The right entity depends on your revenue, profit margin, growth plans, and whether you can handle the added compliance.

Disclaimer:

The content provided on this blog is for educational and informational purposes only. It is not intended as legal, tax, or financial advice, and should not be relied upon as such. Laws and regulations vary by jurisdiction and may change over time. Readers are strongly encouraged to consult with a qualified professional—such as a licensed attorney, accountant, or tax advisor—for advice tailored to their specific situation.