LLC vs C corporation vs S corporation: how to choose

People mix up legal structure and tax treatment. Legal structure is what the state creates: an LLC or a corporation. It decides who owns the company, who is liable for its debts, and how it is governed. Tax treatment is how the IRS taxes it.

An LLC is taxed as a sole proprietorship if it has one owner and as a partnership if it has more, unless it elects otherwise. A corporation is a C corporation by default and can elect to be an S corporation if it qualifies. An LLC can also elect to be taxed as a C or an S corporation. So the real choice is a structure plus a tax result.

This table shows the defaults. Details depend on your state and your facts.

An LLC works well for many small and midsize operating businesses, side businesses, and real estate holdings. It is simple to run, the operating agreement can be shaped to your needs, and the tax treatment is flexible. The cost is that all profit from an active owner tends to be subject to self-employment tax. Some LLC owners later elect S corporation taxation to reduce that.

An S corporation can save payroll tax once profit is high enough. The owner takes a reasonable salary through payroll and takes the remaining profit as distributions that are not subject to payroll tax. The savings have to be weighed against the cost of running payroll, a separate tax return, and the rule that the salary must be reasonable for the work. It does not suit a company that expects to raise money from institutional investors, since S corporations can have only one class of stock and limited kinds of shareholders, and a non-resident alien cannot be a shareholder.

A C corporation is the standard structure for companies that plan to raise venture capital or issue options to many employees. Investors know it, it supports different classes of stock, and it can hold stock that qualifies for the qualified small business stock exclusion, which is available only on C corporation stock and was amended in 2025, so confirm the current rules. The price is the corporate tax on profit and a second layer of tax on dividends. Many startups pay little corporate tax early on because they are not yet profitable.

Some states charge a minimum annual tax or fee for LLCs and corporations alike. California, for example, charges an $800 minimum annual franchise tax for most of them. A cheap formation state can still be expensive if you operate in a costly one, because you also register as a foreign entity where you do business.

You can change structures. An LLC can elect S corporation status or convert to a corporation, and an S corporation can revoke its election. Each switch has tax consequences and paperwork, and a conversion done after the company has grown is more expensive than choosing well at the start. If outside investment is a realistic possibility within a couple of years, start with the structure investors expect.