Guide · Three-way comparison · Last reviewed September 24, 2026
LLC vs C Corp vs S Corp: Inc., LLC, and the federal tax election.
Three structures, three different federal tax treatments. The right answer depends on whether you wantpass-through taxation, retained earnings, or venture capital — and that choice changes the math on every dollar the business earns.
At a glance
| Dimension | LLC (default sole-prop) | S Corporation | C Corporation |
|---|---|---|---|
| Federal income tax | Pass-through to owner (Schedule C) | Pass-through to owner (Form 1120-S → 1040) | 21% corporate tax + dividend tax (double tax) |
| Self-employment / FICA | 15.3% SE on 92.35% of net profit | 15.3% FICA on W-2 salary only | 15.3% FICA on W-2 salary only |
| QBI deduction (§199A) | Yes (eligible) | Yes (eligible) | No (C Corps excluded) |
| Reasonable salary required? | No | Yes | Yes |
| Venture capital compatible? | No | No | Yes (the standard VC structure) |
| Annual filings | Schedule C + Schedule SE | Form 1120-S + payroll + personal 1040 | Form 1120 + payroll + personal 1040 |
| Best for | Side income, low-profit solo businesses | Profitable solo & small businesses | VC-backed startups, businesses retaining earnings |
What 'double taxation' actually means
A C Corporation pays federal corporate income tax on its profit — a flat 21% rate since the 2017 Tax Cuts and Jobs Act. If the corporation then distributes the remaining profit to shareholders as a dividend, the dividend is taxed a second time on each shareholder's personal return at the qualified-dividend rate (0%, 15%, or 20% depending on income).
For a C Corp earning $200K profit and paying out $100K as a dividend to a single owner in the 24% federal bracket, the math looks like:
// C Corp — illustrative $200K profit, $100K dividend
corpTax = $200,000 × 21% = $42,000 (federal corporate tax)
afterCorp = $200,000 − $42,000 = $158,000 (retained + distributed)
dividend = $100,000
divTax = $100,000 × 15% = $15,000 (qualified dividend, 24% bracket)
totalFedTax = $42,000 + $15,000 = $57,000
// Same $200K through an S Corp at $50K salary
llcEquivalentTax ≈ $8,500 (employer FICA) // modeled saving vs default LLC SE tax
Effective difference on $200K profit ≈ $20,000+ in the S Corp's favor at the federal level.The above is a directional illustration, not advice. State income tax, the QBI deduction, reasonable-comp enforcement, and other layers are not included. For a side-by-side at your profit level, run theLLC vs S Corp calculator.
Frequently asked questions
What is the difference between a C Corp and an S Corp?
Both are corporations at the state level. The difference is federal tax treatment. A C Corporation pays federal corporate income tax (21% flat) on its profit, and shareholders pay a second layer of tax on dividends — this is the 'double taxation' concern. An S Corporation is a federal tax election that eliminates the corporate income tax layer: profit passes through to shareholders and is taxed once on their personal returns.
Can an LLC elect to be taxed as a C Corp?
Yes. A multi-member LLC can elect C-Corp treatment by filing IRS Form 8832 (Entity Classification Election). A single-member LLC is automatically taxed as a sole proprietor (disregarded entity) unless it elects otherwise. C-Corp treatment is unusual for small U.S. businesses because it triggers the 21% corporate income tax and double taxation on dividends.
Why would anyone choose a C Corp over an S Corp?
C-Corp treatment is chosen when the business wants to retain earnings inside the corporation (no shareholder-level tax on retained profit), issue multiple classes of stock, or attract venture capital investors (most VCs require C-Corp structure). It is rarely the right answer for a solo U.S. small business.
What does 'Inc.' mean vs 'LLC'?
'Inc.' (short for Incorporated) signals a corporation — either a C Corporation by default, or an S Corporation if Form 2553 has been filed. 'LLC' (Limited Liability Company) is a separate legal structure that, by default, is taxed as a disregarded entity (sole prop), a partnership, or — if elected — as a C Corp or S Corp.
Does an LLC have liability protection like a corporation?
Yes. Both the LLC and the corporation (C or S) shield personal assets from business liabilities. The sole proprietorship offers no liability shield. State law varies on how robust each shield is, but for most small-business purposes the three are comparable.
Which has the lowest federal tax — LLC, S Corp, or C Corp?
For most solo U.S. small businesses, the LLC taxed as an S Corp produces the lowest federal payroll tax (the 15.3% self-employment / FICA layer is limited to the W-2 salary). The C Corp adds a 21% corporate income tax on top of any salary, plus a second layer of tax when dividends are paid. The LLC taxed as a default sole prop has the same payroll tax as a sole proprietorship — no shield from the 15.3%.
Can a C Corp elect S Corp status?
Yes. A corporation can elect S-Corp status by filing IRS Form 2553, provided it meets the eligibility rules (domestic, one class of stock, ≤100 shareholders, all shareholders are individuals/estates/trusts, no non-resident alien shareholders). The election is generally effective for the tax year in which it is filed.
What about the QBI deduction for an S Corp vs C Corp?
Section 199A (the QBI deduction) is generally available to pass-through entities — sole proprietorships, partnerships, S Corporations, and most LLCs. C Corporations are explicitly excluded. If you expect to claim QBI, S Corp treatment preserves it; C Corp treatment does not.
Is it expensive to switch from LLC to C Corp?
Re-electing is mostly a paperwork exercise (Form 8832 plus state filings), but the ongoing cost — 21% federal corporate income tax, separate Form 1120 filing, potential state franchise tax — usually outweighs the benefit for a small business.
Which structure is right for a solo founder?
For most solo U.S. small-business owners with under $200K net profit, the LLC taxed as an S Corp is the right answer once profit justifies the $1,200/yr modeled admin overhead. The C Corp is the right answer when raising venture capital, planning to IPO, or retaining earnings inside the company for reinvestment.
See the LLC vs S-Corp federal tax difference for your numbers.
The BizTaxMetrics calculator models the federal payroll-tax difference between an LLC (default sole-prop treatment) and an S-Corp election using the actual IRS formulas. Updated for tax year 2026.