Should I Be an LLC, S-Corp, or C-Corp?

One of the most common questions we hear from business owners is: "What's the best structure for my business?" The honest answer is it depends on your income, your goals, and how you plan to grow. But here's a breakdown to help you understand the tradeoffs.

Limited Liability Company “LLC” (Taxed as a Sole Proprietorship or Partnership)

A Limited Liability Company is a legal structure, not a tax structure. By default, a single-member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed like a partnership.

Pros:

● Simple to set up and maintain

● Flexible profit-sharing arrangements between owners

● Liability protection (your personal assets are generally shielded from business debts)

Cons:

● All net income is subject to self-employment tax (15.3%), even if you're not actively working in the business

● No option to split income between salary and distributions

S-Corporation

An S corporation is a tax election — you can elect it as an LLC or a corporation. It lets you pay yourself a "reasonable salary" and take the remaining profit as a distribution, which is not subject to self-employment/payroll tax.

Pros:

● Potential self-employment tax savings once profits exceed a certain threshold

● Still offers liability protection

Cons:

● Requires payroll, which adds administrative cost and complexity

● The IRS requires a "reasonable salary" — you can't take everything as a distribution

● More formalities: separate tax return, corporate minutes, etc.

C-Corporation

A C corporation is a separate taxpaying entity. It pays its own corporate tax (flat 21% federal rate), and then shareholders pay tax again on dividends — this is often called "double taxation."

Pros:

● Flat 21% corporate tax rate can be attractive for businesses that retain earnings for growth

● Useful for businesses planning to raise venture capital or eventually go public

● Potential eligibility for Qualified Small Business Stock (QSBS) tax exclusion on a future sale

Cons:

● Double taxation on distributed profits

● More complex compliance and less flexibility for owners who want to pull cash out regularly

So which one is right for you?

A few rules of thumb:

● Just starting out, modest profit? An LLC (taxed as sole prop or partnership) is often simplest.

● Consistently profitable and taking money out regularly? An S-Corp election often saves real money on self-employment tax.

● Building toward outside investment, or planning to reinvest profits rather than distribute them? A C-Corp may make more sense.

The right answer depends on your specific numbers — projected profit, how much you need to pay yourself, your growth plans, and your exit strategy. This is exactly the kind of decision worth reviewing with your tax advisor before you file your entity election, since changing structures mid-year can be messy.

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