Introduction
Business entity choice gets treated as a legal formality when it's really a tax decision — and on meaningful profit levels, the spread between the best and worst choice can exceed $20,000 a year. This guide compares how LLCs, S-Corps, and C-Corps are actually taxed in 2026, and where the real break-even points sit.
Note: This is educational information, not tax or legal advice. Entity choice affects liability protection, fundraising, and multi-year tax planning — work with a qualified accountant or attorney before making or changing your structure.
Table of Contents
- The Core Mechanics, in One Table
- The LLC Default: All Profit Hits Self-Employment Tax
- The S-Corp Election: Splitting Salary and Distributions
- The "Reasonable Salary" Requirement
- The C-Corp: Double Taxation, and When It Still Wins
- A Real-Numbers Example
- The QBI Deduction
- How to Actually Decide
- FAQ
- Conclusion
The Core Mechanics, in One Table
| LLC (default) | S-Corp election | C-Corp | |
|---|---|---|---|
| How profit is taxed | 100% subject to 15.3% SE tax | Only salary subject to payroll tax | 21% flat corporate rate |
| Double taxation? | No | No | Yes, on distributed dividends |
| QBI deduction eligible? | Yes | Yes | No |
| Compliance burden | Low | Moderate (payroll required) | Highest |
| Best suited for | Early-stage, profit under ~$40-60K | Profitable, distributing profit | VC-backed, reinvesting profit |
The LLC Default: All Profit Hits Self-Employment Tax
By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC as a partnership — the IRS doesn't recognize "LLC" as a federal tax classification at all; it's purely a state-law legal structure. Either way, 100% of net profit is subject to self-employment tax: 15.3% on profit up to the Social Security wage base ($184,500 for 2026), then 2.9% (Medicare only) above that threshold.
On $100,000 in net profit, that's roughly $14,000+ in self-employment tax alone — before regular federal and state income tax is even calculated. This is the single biggest reason profitable LLC owners look at electing S-Corp taxation.
The S-Corp Election: Splitting Salary and Distributions
An LLC (or corporation) can elect S-Corp tax treatment by filing IRS Form 2553. Once elected, the owner becomes an employee of the business, paid a salary — subject to standard payroll taxes — and can take additional profit as distributions, which are not subject to self-employment tax.
This is the entire mechanism, and it's the whole reason S-Corp elections exist for small business owners — not liability protection (an LLC already provides that), not simplicity (S-Corps are more complex to run), just this specific tax treatment difference.
Illustrative example: a consulting business with $120,000 in profit, taxed as a default LLC, pays roughly $18,000+ in self-employment tax on the full amount. The same business, electing S-Corp status with a $60,000 reasonable salary, pays payroll tax only on that $60,000 — cutting the self-employment-tax-equivalent burden roughly in half, while the remaining $60,000 flows through as a distribution.
The "Reasonable Salary" Requirement
This is the rule that keeps the S-Corp strategy from being an unlimited tax-avoidance loophole: the IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" — comparable to what the market would pay someone else doing the same work — before taking additional profit as distributions.
Setting salary artificially low specifically to maximize distributions is a well-documented audit trigger. The tax savings from an S-Corp election are real, but they work within a defensible salary range, not by minimizing salary toward zero — an accountant experienced with S-Corp compensation is worth involving here specifically, since "reasonable" isn't a fixed formula, it's a facts-and-circumstances standard.
The C-Corp: Double Taxation, and When It Still Wins
A C-Corp is a genuinely separate taxpayer: the business pays a flat 21% federal corporate rate on its profits, and if those profits are later distributed to shareholders as dividends, the shareholders pay tax again — at qualified dividend rates (0-23.8%) — on the same money. On $200,000 in distributed profit, this double taxation can cost meaningfully more than the equivalent S-Corp structure.
C-Corps still make sense when:
- Raising institutional/VC funding — investors generally prefer or require this structure
- Planning for a QSBS-eligible exit — Qualified Small Business Stock provisions can exclude significant capital gains from tax under specific holding-period and eligibility rules
- Reinvesting all profit rather than distributing it — if nothing is distributed, only the 21% corporate-level tax applies, which can beat an individual's marginal rate at higher income levels
- Ownership disqualifies S-Corp status — S-Corps cap out at 100 shareholders and generally can't have foreign or certain entity-type owners; C-Corps have no such restriction
A Real-Numbers Example
Illustrative comparison at $150,000 in net profit for a single owner:
- Default LLC: ~$20,000+ in self-employment tax on the full amount, on top of regular income tax
- S-Corp election (with a defensible reasonable salary): meaningfully lower combined tax versus the default LLC — the specific savings depend on the salary/distribution split chosen
- C-Corp, fully distributed: corporate tax at 21%, plus dividend tax on the distributed portion — often the least efficient structure specifically when profit is being taken out of the business, not reinvested
The pattern holds broadly across profit levels: S-Corp election tends to win for active, profitable businesses distributing income to their owner; C-Corp tends to win specifically for reinvestment- or investor-funding-focused businesses.
The QBI Deduction
The Qualified Business Income (QBI) deduction — up to 20% of qualified business income — is available to pass-through entities: sole proprietorships, partnerships, LLCs, and S-Corps. It is not available to C-Corps, since C-Corp income isn't pass-through income at all. This deduction was made permanent for pass-through entities under 2025 tax legislation, adding further weight to the pass-through side of the comparison for businesses that qualify (QBI has its own income limits and phase-outs worth checking with an accountant).
How to Actually Decide
- Under ~$40,000 in profit? The added payroll complexity of an S-Corp likely isn't worth it yet — a default LLC or sole proprietorship is simpler and the tax savings are modest at this level.
- $40,000-$60,000+ in profit, actively distributing income to yourself? This is where S-Corp election typically starts paying for itself — model your specific numbers with an accountant rather than relying on general thresholds.
- Raising venture capital, or planning to reinvest profit rather than take it out? A C-Corp is likely the better fit, despite the double-taxation exposure on distributions you're not planning to take anyway.
- Foreign owners, more than 100 shareholders, or other S-Corp-disqualifying factors? C-Corp isn't a choice at that point — it's often the only structure that fits.
Conclusion
There's no universally "best" entity — there's only the structure that fits your actual profit level, your plans for that profit (distribute it or reinvest it), and your fundraising path. What the data consistently shows is that defaulting to whatever structure you formed on day one, without revisiting it as profit grows, is often the most expensive choice of all — the businesses getting this right are the ones who treat entity structure as a number to recheck annually, not a one-time decision.
If you'd like help modeling what your specific numbers look like across these structures, get in touch for a free consultation.