LLC vs S-Corp vs C-Corp: Tax Elections Explained
Most owners confuse legal structure with tax treatment. This guide shows what changes when you stay default LLC, elect S-Corp, or elect C-Corp—and how to decide using projections.
An LLC is a legal entity. The IRS applies default taxation (sole prop or partnership) unless you elect S-Corp (Form 2553) or C-Corp (Form 8832). The best “choice” depends on profit level, payroll readiness, reinvestment plans, and compliance tolerance.
Most business owners assume “LLC” automatically means a specific tax structure. It doesn’t. Your state filing creates the legal wrapper; your IRS tax election determines how profits flow to you, whether payroll is required, and how much tax you pay on your earnings.
Core Concept: Legal Entity vs Tax Election
Think of your legal entity as the container (LLC or corporation), and your tax election as the rulebook the IRS uses to tax what’s inside. By default:
- Single-member LLC → taxed like a sole proprietorship
- Multi-member LLC → taxed like a partnership
You don’t “become” an S-Corp by forming an LLC. You become an S-Corp for tax purposes only after filing the election—and then you must operate like one (including payroll).
How Each Option Works (Practical Breakdown)
LLC Default Taxation
Default LLC taxation is often the simplest path early on. It’s flexible and usually doesn’t require payroll. The common downside is that profits can be exposed to self-employment taxes depending on your setup and role.
S-Corp Election
S-Corp taxation is a pass-through structure that typically requires you (if active in the business) to pay yourself a reasonable salary through payroll, then take the remaining profit as distributions. The goal is to reduce payroll/self-employment tax exposure while staying compliant.
C-Corp Election
C-Corp taxation can be powerful for reinvestment strategies, certain benefit structures, and businesses planning to raise capital. The key tradeoff is potential double taxation when profits are paid out as dividends, and more complex ongoing compliance.
Comparison Table: What Changes in the Real World
| Structure | Tax type | Payroll expectation | Common best fit |
|---|---|---|---|
| LLC (default) | Pass-through | Often no payroll initially | Early-stage businesses prioritizing simplicity |
| S-Corp (election) | Pass-through (salary + distributions) | Yes (reasonable salary if active) | Owner-operators with consistent profit and payroll readiness |
| C-Corp (election) | Corporate taxation | Often yes if owners are employees | Reinvestment-focused businesses, benefits planning, raising capital |
Example: When an S-Corp Can Change the Outcome
If you earn strong profits and you’re actively operating the business, S-Corp treatment may reduce payroll/self-employment tax exposure by splitting compensation into salary + distributions. But this only works if the salary is reasonable and the payroll/compliance cost doesn’t erase the benefit.
For a deeper “timing” guide on the election itself, see: When Should an LLC Elect S-Corporation Status? A Practical Guide .
How Qupid Tax Helps You Choose the Right Election
We don’t start with the form—we start with projections. Qupid Tax runs side-by-side scenarios for LLC default vs S-Corp vs C-Corp using your real revenue, expenses, owner role, and growth plans. Then we implement the election and align payroll + bookkeeping so the strategy stays compliant.
Frequently Asked Questions
Related Guides from Qupid Tax Advisors
- LLC Tax Classification Explained for Entrepreneurs
- When Should an LLC Elect S-Corporation Status? A Practical Guide
- The Real Financial Impact of Tax Elections on Cash Flow & Audit Risk
- Why “Just Setting Up an LLC Online” Creates Tax Problems Later
- The 7-Figure Business Owner’s Guide to Choosing the Right Tax Structure
- What the IRS Really Looks For in an Audit (and How to Stay in the Clear)