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

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

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

The most common question from new business owners is “should I be an LLC, S-Corp, or C-Corp?” The question mixes two different decisions: the legal structure (how the business is organized under state law) and the tax election (how the IRS taxes the business). These are independent choices. An LLC is a legal entity. An S-Corp is a tax election. You can have an LLC that’s taxed as an S-Corp. Understanding this distinction prevents the most common entity structure mistakes.

✓Key takeaway

Legal structure vs. tax election:

Legal structures (state law):

Sole proprietorship: no formal entity. The owner IS the business. No liability protection.
LLC (Limited Liability Company): a state-level entity that provides liability protection. Members’ personal assets are generally protected from business debts.
Corporation: a state-level entity with shareholders, directors, and officers. Strongest liability protection. More formalities (bylaws, minutes, annual meetings).

Tax elections (IRS):

Disregarded entity (default for single-member LLC): taxed like a sole proprietorship (Schedule C)
Partnership (default for multi-member LLC): taxed on Form 1065, K-1 to members
S-Corporation (election via Form 2553): taxed on Form 1120-S, K-1 to shareholders. Reduces SE tax on distributions.
C-Corporation (default for corporations, or elected via Form 8832): taxed on Form 1120. Corporate-level tax at 21%. Dividends taxed again to shareholders (double taxation).

The common path for small businesses:

Start as sole proprietorship (simplest, no filing)
Form an LLC when liability protection is needed
Elect S-Corp taxation (Form 2553) when net profit exceeds $50,000-$70,000 (SE tax savings justify the compliance cost)
Consider C-Corp ONLY for businesses seeking QSBS exclusion (IRC 1202), outside investors, or retained earnings taxed at the 21% corporate rate

Comparison at $120,000 net profit (single filer):

Sole prop / single-member LLC (disregarded):

SE tax: $16,946
Income tax: approximately $10,100
QBI deduction: $24,000
Total tax: $27,046
Compliance cost: $0-$500 (Schedule C on personal return)

LLC taxed as S-Corp:

Reasonable salary: $55,000
Employer FICA: $4,208
Employee FICA: $4,208
K-1: $60,792
Income tax: approximately $12,000
QBI on K-1: $12,158
Total tax: $20,416
Compliance cost: $2,000-$3,500 (payroll + S-Corp return)
Net savings vs. sole prop: $4,130

C-Corp:

Corporate income: $120,000
Corporate tax (21%): $25,200
If all remaining profit is distributed as salary: FICA applies
If distributed as dividends: qualified dividend rate (15-20%)
Assuming $60,000 salary, $34,800 in dividends:
- Salary FICA (employer + employee): $9,180
- Corporate tax on remaining $60,000 - $4,590 employer FICA = $55,410 x 21% = $11,636
- Dividend tax: ($55,410 - $11,636) x 15% = $6,566
- Personal income tax on salary: approximately $5,000
- Total tax: approximately $32,382
Compliance cost: $2,000-$4,000
MORE expensive than sole prop by $5,336

The C-Corp is more expensive at $120,000 net profit due to double taxation. The C-Corp becomes advantageous ONLY when:

QSBS exclusion applies (eliminating capital gains tax on an eventual sale, saving $200,000+ on a $1 million exit)
The business retains earnings at the 21% corporate rate (lower than the owner’s personal rate of 32%+)
Outside investors require corporate structure

When does each entity type make sense?

Hypothetical example

Round numbers. For current guidance, see IRS LLC guidance. Three business owners, each with different situations:

Owner A: Solo plumber, $80,000 net profit. Best choice: LLC taxed as S-Corp.

S-Corp saves approximately $3,400/year in SE tax (after compliance costs)
No outside investors, no plans to sell the business for $1 million+
C-Corp would create double taxation with no offsetting benefit

Owner B: Tech startup founder, $50,000 net profit now, expects $5 million exit in 7 years. Best choice: C-Corporation.

Current net profit is low, so double taxation cost is small
QSBS exclusion (IRC 1202): $5 million gain x 0% = $0 federal tax at exit
If structured as an S-Corp: $5 million gain x 23.8% = $1,190,000 in capital gains tax at exit
The QSBS exclusion saves $1,190,000, far exceeding the double taxation cost during operations
Must be a C-Corp from day one for the 5-year holding period requirement

Owner C: Freelance graphic designer, $40,000 net profit. Best choice: Sole proprietorship or single-member LLC (disregarded).

At $40,000 net, the S-Corp SE tax savings (~~$1,500) are offset by compliance costs (~~$2,000)
Net S-Corp benefit: ($500), meaning the S-Corp costs MORE than it saves
The designer should stay as a sole prop until net profit exceeds $50,000-$60,000, then re-evaluate

Summary decision framework:

Net Profit	Entity Recommendation
Under $50,000	Sole prop or LLC (disregarded)
$50,000-$70,000	Evaluate S-Corp (depends on WC rate, state fees)
Over $70,000	S-Corp almost always saves money
Any level, planning $1M+ exit	Evaluate C-Corp for QSBS
Seeking outside investors	C-Corp (VCs prefer it)

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.

How does choosing the wrong entity structure affect my taxes?

The wrong entity can cost thousands in unnecessary taxes annually. A sole proprietor earning $120,000 pays roughly $17,000 in self-employment tax; an S-Corp paying a $70,000 reasonable salary saves approximately $7,650 in FICA on the remaining $50,000. Conversely, an S-Corp for a business earning $40,000 creates more compliance cost (payroll, separate return) than the FICA savings justify. A C-Corp creates double taxation on distributions unless the owner takes all profits as salary, which maximizes FICA. Switching later is possible but can trigger tax consequences: converting a C-Corp to an S-Corp subjects built-in gains to a 5-year recognition period.

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Cite this page

Yarik Yarosh, CPA. "LLC vs. S-Corp vs. C-Corp: Complete Tax Comparison for Small Businesses." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-llc-vs-scorp-vs-ccorp-comparison

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