LLC vs S-Corp vs C-Corp: Tax Elections Explained

Learn how tax elections — not your legal filing — change how much tax you pay each year, with practical examples and when to consider each option.

Most business owners think entity type and tax treatment are the same. They’re not. Your tax election (S-Corp, C-Corp, or default pass-through) determines payroll, self-employment tax, and how profits are taxed.

Key takeaway: An LLC is a legal entity — the IRS assigns default tax treatment, but you can elect S-Corp or C-Corp taxation when it benefits your business. Plan with projections to know which saves you the most.

Understanding LLC vs S-Corp vs C-Corp

The simple rule: your legal entity and your tax election are separate. Forming an LLC creates a state-level legal entity; the IRS then applies a default tax treatment (sole proprietorship or partnership) unless you file Form 2553 (S-Corp) or Form 8832 (C-Corp election). That election changes payroll needs, self-employment tax exposure, and how owners receive income.

How Tax Elections Actually Work

Below is a practical breakdown of the common options and when they tend to make sense for small businesses and investors.

LLC (Default Taxation)

IRS View: Single-member → sole proprietor; Multi-member → partnership. Pros: simple, no payroll required initially, flexible deductions. Cons: full income may be subject to self-employment tax.

S-Corp Election

Requirements: U.S. entity, one class of stock, fewer than 100 owners, and you must pay yourself a reasonable salary. Benefits: salary + distributions split can reduce self-employment taxes. Ideal for businesses with net profits generally above a threshold (commonly $60k+), depending on circumstances.

C-Corp Election

Pros: corporate tax treatment often useful for retained earnings, fringe benefit planning, and raising capital. Cons: potential double taxation on dividends and more complex compliance for small owner-operated businesses.

When Each Election Makes Sense — Example

Maria earns $140,000 through her LLC. Under default LLC taxation she pays self-employment tax on the full amount. If she elects S-Corp and pays herself a $70k reasonable salary + $70k distribution, she generally reduces payroll/self-employment taxes—often saving several thousand dollars per year (exact savings depend on state taxes and payroll setup).

Structure	Tax Type	Self-Employment Tax	Best For
LLC (default)	Pass-through	High (full profit subject)	New or small businesses that prioritize simplicity
S-Corp (election)	Pass-through (salary + distributions)	Lower (salary subject; distributions not)	Profitable businesses where owner salary + distribution split reduces payroll tax
C-Corp (election)	Corporate taxation	None at corporate level (but dividends taxed)	Firms reinvesting profits, seeking VC, or needing corporate benefit structures

Real-World Application

Many service businesses and investors start as LLCs and later elect S-Corp once net profits justify payroll compliance. C-Corps are less common for small owner-operators but can be advantageous for capital-intensive scaling and fringe benefit planning. According to IRS analysis and practitioner experience, a meaningful share of small business tax savings comes from well-timed S-Corp elections, but accurate forecasting is essential.

How Qupid Tax Helps

We run side-by-side projections so you can see the after-tax outcome for LLC (default), S-Corp, and C-Corp scenarios. We implement elections, set up payroll, and adjust bookkeeping so your records reflect the election and stand up to compliance review.

FAQs

Is an LLC the same as an S-Corp?› No. An LLC is a legal entity; S-Corp is a tax election. An LLC can elect to be taxed as an S-Corp by filing Form 2553. Do S-Corps really save taxes?› Often yes—by allowing an owner to split compensation into salary and distributions, reducing payroll/self-employment taxes. Savings depend on reasonable salary and business specifics. When should I elect S-Corp status?› Many advisors consider S-Corp elections when net profits surpass $60k–$80k, but it varies—model your specific payroll and tax situation first. Is a C-Corp always bad due to double taxation?› Not necessarily. C-Corps can be ideal for reinvestment, employee benefits, or raising capital; the tax tradeoffs must be weighed against business goals. Related Guides & Resources

• Choosing the Right Entity Structure
• Tax Planning for Small Businesses
• S-Corp Tax Strategy Guide

Ready to Pick the Right Tax Election?

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Disclosure: This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Specific tax outcomes depend on individual circumstances and jurisdictions. Consult a qualified CPA or tax advisor before implementing any tax, accounting, or legal strategy.