C-Corp vs. S-Corp vs. LLC: Which Entity Structure Is Right for Your Business?

Q: How does choosing the wrong business entity affect your taxes?

The entity structure you select (sole proprietorship, LLC, S-Corp, C-Corp, partnership) determines how business income is taxed, what employment taxes apply, and what deductions are available. A sole proprietor pays self-employment tax (15.3%) on all net business income, while an S-Corp owner pays FICA only on a reasonable salary and takes remaining profits as distributions. A C-Corp pays a flat 21% corporate tax rate but creates double taxation when distributing dividends to shareholders.

Q: What is a single-member LLC and how is it taxed?

A single-member LLC is a legal entity with one owner. The IRS treats it as a disregarded entity by default, meaning it does not file its own return; income and expenses flow directly to Schedule C on the owner's personal Form 1040. The LLC provides liability protection without adding a separate tax return. Self-employment tax applies to all net income, same as a sole proprietorship. You can elect S-Corp taxation by filing Form 2553, which keeps the LLC legal structure while changing the tax treatment to require a reasonable salary and allowing the remaining profit as a distribution free of FICA.

By Yarik Yarosh, CPA ·September 5, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Choosing the right entity structure is one of the most consequential tax decisions a business owner makes, yet many owners either pick the wrong structure or never revisit the decision as their business grows. The three most common structures for small businesses are the LLC (Limited Liability Company), the S-Corporation, and the C-Corporation. Each has distinct tax treatment, liability protection, and operational requirements. A sole proprietorship (or single-member LLC taxed as a disregarded entity) is the simplest but offers no self-employment tax savings. An S-Corp election (available to LLCs or corporations) avoids double taxation and provides self-employment tax savings through the salary/distribution split. A C-Corp is the structure venture capital investors typically require and offers a flat 21% corporate rate, but profits are taxed twice (at the corporate level and again when distributed to shareholders).

✓Key takeaway

Entity comparison:

Sole Proprietorship / Single-Member LLC (default):

Simplest structure, lowest compliance cost
No entity-level tax (all income on owner’s personal return)
Self-employment tax on 100% of net profit (15.3% on first $176,100, 2.9% above)
No separation between owner and business for SE tax purposes
Personal liability protection (if LLC is maintained with proper formalities)
QBI deduction available (20% of qualified business income, subject to SSTB rules)
Best for: businesses under $50,000-$60,000 in net profit, or in the startup phase

S-Corporation (LLC or corporation with S election):

Pass-through taxation (no entity-level federal tax)
Owner pays self a “reasonable salary” (subject to FICA)
Remaining profit distributed as K-1 (NOT subject to FICA)
FICA savings: the difference between SE tax on full profit and FICA on salary only
Must have 100 or fewer shareholders, one class of stock, US shareholders only
Requires payroll (W-2 for owner), annual filing (Form 1120S), and K-1 preparation
QBI deduction available (20% of K-1 income, reduced by W-2 wages paid)
Best for: businesses with $60,000-$400,000+ in net profit, no outside investors requiring equity classes

C-Corporation:

Separate tax entity (pays corporate income tax at 21% flat rate)
Distributions to shareholders are taxed again as dividends (double taxation)
Combined effective rate: 21% + (79% x 23.8% capital gains on dividends) = approximately 39.8%
BUT: no self-employment tax on corporate income
Can have unlimited shareholders, multiple stock classes, foreign shareholders
Retained earnings taxed at only 21% (much lower than personal rates for high earners)
QSBS exclusion: up to $10 million of gain on sale of qualifying C-Corp stock is tax-free (IRC 1202)
Best for: businesses seeking venture capital, planning to retain significant earnings, or targeting the QSBS exclusion

Partnership / Multi-Member LLC:

Pass-through taxation (no entity-level federal tax)
Income allocated per operating agreement (not necessarily equally)
Self-employment tax on general partners’ shares (limited partners may be exempt)
Flexibility in profit/loss allocations and special allocations
More complex than S-Corp (guaranteed payments, capital accounts, substantial economic effect rules)
Best for: businesses with multiple owners wanting flexible profit sharing

Key decision factors:

Factor	Sole Prop/LLC	S-Corp	C-Corp
SE tax savings	None	Yes (salary/distribution split)	N/A (not self-employed)
Double taxation	No	No	Yes
QBI deduction	Yes	Yes (on K-1)	No
Payroll required	No	Yes (owner salary)	Yes (if paying owners)
Compliance cost	$0-$500/year	$1,500-$3,500/year	$2,000-$5,000/year
Outside investors	Possible but limited	100 shareholders max, 1 stock class	Unlimited
QSBS eligible	No	No	Yes
Self-employed health insurance	Deductible on 1040	Deductible (special rules for >2% shareholder)	Employer plan (deductible to corp)

When should you switch from sole prop to S-Corp?

Hypothetical example

Round numbers. For current guidance, see IRS LLC guidance. A single filer service business owner. No employees. Not an SSTB.

At $50,000 net profit:

Sole prop:

SE tax: $50,000 x 92.35% x 15.3% = $7,065
QBI: $50,000 x 20% = $10,000
Taxable: $50,000 - $3,533 - $15,000 - $10,000 = $21,467
Income tax: $2,412
Total: $9,477

S-Corp ($35,000 salary):

FICA: $35,000 x 15.3% = $5,355
QBI: $15,000 x 20% = $3,000
Taxable: $50,000 - $15,000 - $3,000 = $32,000
Income tax: $3,558
S-Corp costs: $2,200
Total: $11,113

S-Corp LOSES by $1,636. The compliance costs outweigh the FICA savings at $50,000. The QBI deduction is also reduced (from $10,000 to $3,000) because K-1 income is lower.

At $80,000 net profit:

Sole prop:

SE tax: $80,000 x 92.35% x 15.3% = $11,304
QBI: $80,000 x 20% = $16,000
Taxable: $80,000 - $5,652 - $15,000 - $16,000 = $43,348
Income tax: $5,028
Total: $16,332

S-Corp ($40,000 salary):

FICA: $40,000 x 15.3% = $6,120
QBI: $40,000 x 20% = $8,000
Taxable: $80,000 - $15,000 - $8,000 = $57,000
Income tax: $7,208
S-Corp costs: $2,200
Total: $15,528

S-Corp saves $804. Barely positive. This is near the break-even point.

At $120,000 net profit:

Sole prop: Total $27,400 S-Corp ($50,000 salary): Total $21,900 S-Corp saves $5,500.

At $200,000 net profit:

Sole prop: Total $51,700 S-Corp ($65,000 salary): Total $40,100 S-Corp saves $11,600.

The pattern:

Net Profit	Sole Prop Tax	S-Corp Tax	S-Corp Savings
$50,000	$9,477	$11,113	-$1,636 (lose)
$80,000	$16,332	$15,528	$804
$100,000	$21,790	$18,900	$2,890
$120,000	$27,400	$21,900	$5,500
$150,000	$35,695	$28,580	$7,115
$200,000	$51,700	$40,100	$11,600

Break-even: approximately $70,000-$80,000 in net profit. Below that, the S-Corp compliance cost ($2,200/year for payroll + tax return + bookkeeping) outweighs the FICA savings.

When to choose a C-Corp:

You’re seeking venture capital (VCs require C-Corp for preferred stock, liquidation preferences)
You plan to retain most earnings in the business (21% corporate rate < 37% personal rate)
You’re targeting QSBS (the $10M capital gains exclusion on sale of qualifying stock held 5+ years)
You have significant intellectual property that will appreciate (shields gain inside the C-Corp)

C-Corp math at $200,000 net profit (retained):

Corporate tax: $200,000 x 21% = $42,000
Cash retained in business: $158,000
If distributed as dividend: $158,000 x 23.8% = $37,604
Total (earned + distributed): $79,604 (39.8% effective)
S-Corp total: $40,100 (20.1%)
C-Corp with distributions costs $39,504 MORE than S-Corp

But if the C-Corp retains the earnings:

Only $42,000 in tax (21%)
The remaining $158,000 stays in the business, invested, growing
No additional tax until distributed
At sale: QSBS exclusion eliminates up to $10M of gain
For a growth business that will be sold: C-Corp + QSBS can be tax-optimal

Illustrative numbers only, not a real client and not advice for your facts.

How does choosing the wrong business entity affect your taxes?

The entity structure you select (sole proprietorship, LLC, S-Corp, C-Corp, partnership) determines how business income is taxed, what employment taxes apply, and what deductions are available. A sole proprietor pays self-employment tax (15.3%) on all net business income, while an S-Corp owner pays FICA only on a reasonable salary and takes remaining profits as distributions. A C-Corp pays a flat 21% corporate tax rate but creates double taxation when distributing dividends to shareholders. Changing entity type mid-stream can trigger tax consequences: converting a C-Corp to an S-Corp subjects built-in gains to the BIG tax (IRC 1374) for 5 years. The right structure depends on your income level, growth plans, number of owners, and exit strategy, and the answer can change as your business evolves.

What is a single-member LLC and how is it taxed?

A single-member LLC is a legal entity with one owner. The IRS treats it as a disregarded entity by default, meaning it does not file its own return; income and expenses flow directly to Schedule C on the owner’s personal Form 1040. The LLC provides liability protection without adding a separate tax return. Self-employment tax applies to all net income, same as a sole proprietorship. You can elect S-Corp taxation by filing Form 2553, which keeps the LLC legal structure while changing the tax treatment to require a reasonable salary and allowing the remaining profit as a distribution free of FICA. State treatment varies: some states charge an annual LLC fee or franchise tax regardless of federal tax election.

Related guides:

LLC vs. S-Corp vs. C-Corp: Complete Tax Comparison for Small Businesses

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Cite this page

Yarik Yarosh, CPA. "C-Corp vs. S-Corp vs. LLC: Which Entity Structure Is Right for Your Business?." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-c-corp-vs-scorp-vs-llc-comparison

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.