llc vs. s-corp vs. c-corp: choosing the right entity

llc — liability protection and pass-through tax

An LLC offers liability protection and pass-through taxation with minimal paperwork — the default for most small businesses and rentals. Profits pass through to the owners' personal returns; the entity itself doesn't pay federal income tax.

The main tax drag for a profitable service LLC is self-employment tax. For 2026 the Social Security wage base is $184,500 and the SE rate is 15.3% on 92.35% of net earnings. An LLC owner pays SE tax on essentially all net profit, which is where the S-corp election starts to matter.

s-corp — the tax election that cuts self-employment tax

An S-corp is a tax election (not a separate entity type) made on top of an LLC or C-corp. It lets owners take a reasonable salary plus distributions; the salary is subject to payroll tax but the distribution portion is not. That's the core saving — SE tax applies only to the reasonable salary, not to the full profit.

The trade-offs: it requires running payroll for the owner (a real cost and administrative burden), reasonable-compensation discipline (the salary must reflect market rates for the work, or the IRS reallocates distributions to wages), and stricter ownership rules — no more than 100 shareholders, US residents only, one class of stock.

• Salary is subject to payroll tax; distributions are not.
• Owner must run actual payroll and pay themselves a reasonable salary.
• Max 100 shareholders, US residents, one class of stock.
• Best for profitable service businesses where the owner's labor drives the income.

c-corp — when double taxation is worth it

A C-corp pays its own corporate tax and is taxed again when profits are distributed as dividends — a double tax that's usually bad for small owners who want to pull money out. But the C-corp is the right structure if you plan to raise institutional capital (VCs and most institutional investors require C-corps), offer equity incentives broadly to employees, or eventually sell the company.

Qualified Small Business Stock (QSBS) can exclude up to $10 million or 10× basis of gain on the sale of a qualifying C-corp held for 5+ years — a benefit no pass-through entity can match. For a fundable, exit-oriented business, the C-corp's double tax is the price of optionality.

how to decide — and revisit as you grow

A practical default: LLC for liability protection at formation; elect S-corp taxation once profit is stable and high enough that the SE-tax savings clearly exceed the cost of running owner payroll (often around $60k–$80k+ net profit); convert to C-corp only when raising institutional capital or planning an exit that could trigger QSBS.

The decision is not one-and-done. As income, ownership, and plans change, the optimal structure changes with them. AA models the after-tax outcome of each structure against a client's real income and revisits the election as the business grows — so the structure never quietly falls behind the business.