LLC vs S-Corp vs C-Corp.
Which structure actually saves money?
The choice between LLC, S-Corp, and C-Corp is one of the most-searched self-employment questions and one of the most-misunderstood. The right answer depends on your net income, your business type, your state, and your exit plans. This page walks through the real math.
READING TIME: 9 MIN
Under approximately $40,000 of net business income: keep an LLC taxed as a sole proprietor. From $40,000 to $80,000: the S-Corp election starts making sense if your state does not have a punishing franchise tax. Above $80,000: the S-Corp election usually saves meaningful money. The C-Corp is almost never the right choice for a solo operator unless you are raising venture capital or pursuing a Qualified Small Business Stock exit.
Section 1 · What each one is
A legal structure, not a tax structure. Provides liability protection (your personal assets are separate from business liabilities). By default, an LLC is taxed as a sole proprietor (single-owner) or partnership (multiple owners). It can elect to be taxed as an S-Corp or C-Corp. The flexibility is the LLC's main feature.
All net business income is subject to self-employment taxself-employment taxThe 15.3% tax self-employed people pay on business income to cover both the employee and employer share of Social Security and Medicare.Full definition (15.3% on the first $176,100 in 2026, 2.9% Medicare beyond that, plus 0.9% Additional Medicare above $200k single / $250k MFJMarried Filing Jointly (MFJ)A tax filing status where a married couple combines their income and deductions on one tax return.) plus regular income tax. Simplest structure. No separate payroll required.
A tax election, not a separate legal structure. An LLC can elect S-Corp tax treatment via Form 2553. Owner-operators pay themselves a "reasonable salary" subject to payroll taxes (15.3% FICAFederal Insurance Contributions Act (FICA)The payroll tax that funds Social Security and Medicare, split between employee and employer.Full definition). Profit above the salary is distributed and is NOT subject to self-employment tax. The tax savings come from the distribution portion.
A separate legal entity with its own 21% flat federal corporate rate (post-TCJATax Cuts and Jobs Act (TCJA)The big 2017 federal tax law. It nearly doubled the no-questions-asked tax deduction everyone gets, limited the deduction for state and local taxes to $10,000, and cut corporate and individual tax rates. Most of the personal tax cuts expire at the end of 2025 unless Congress extends them.Full definition, permanent). Dividends paid to owners are taxed again at ordinary income rates. Double taxation makes C-Corp inefficient for most small-business owners. Correct structure for: raising venture capital, planning an IPOInitial Public Offering (IPO)When a private company sells shares to the public for the first time, allowing anyone to buy and trade them., issuing stock options broadly, or pursuing the QSBS capital-gains exclusion (Section 1202).
Section 2 · The S-Corp tax math
The savings from an S-Corp election come from avoiding self-employment tax on the distribution portion of profit.
Without S-Corp (sole proprietor):
SE tax on $150,000 (capped at SS wage base for SS portion, plus 2.9% Medicare on the rest, plus 0.9% Additional Medicare on income above threshold): approximately $19,800 in self-employment tax.
With S-Corp (salary $70,000, distribution $80,000):
Payroll taxes on $70,000 salary: 15.3% × $70,000 = $10,710. No SE tax on $80,000 distribution.
Tax savings: approximately $9,000-$12,000 per year (varies with the salary chosen and the SS wage-base interaction).
But S-Corp costs money to operate
- Payroll processing: approximately $500-$1,500/year (Gusto, ADP, QuickBooks Payroll, OnPay)
- Additional accounting and tax preparation: approximately $1,000-$2,500/year (S-Corp returns are more complex than Schedule C)
- State franchise / corporate fees vary widely. California is the punishing exception: $800/year minimum franchise tax even with no income, plus 1.5% of net income for S-Corps verify×DON'T TRUST, VERIFYClaim: California imposes an $800/yr minimum franchise tax plus 1.5% net-income tax on S-Corps.Verify at: FTB S-Corporation page ↗CA FTB publishes the rates. The $800 minimum and 1.5% rate are unusual; most states don't tax S-Corps at the entity level..
- One-time S-Corp election filing: free (Form 2553)
Break-even analysis
Approximate break-even: $40,000-$60,000 in net business income outside California. In California, the $800 minimum franchise tax plus 1.5% S-Corp tax pushes break-even higher (typically $80,000+).
Section 3 · The reasonable salary requirement
The IRS requires S-Corp owner-operators to pay themselves a "reasonable salary" before taking distributions. What "reasonable" means: what a comparable employee would be paid for the same work, not $1 to minimize payroll tax. The IRS audits S-Corps with suspiciously low salaries, and the cost of being wrong is reclassification of distributions as wages plus penalties verify×DON'T TRUST, VERIFYClaim: The IRS audits S-Corps for reasonable compensation and can reclassify distributions as wages.Verify at: IRS S-Corp compensation page ↗The IRS publishes guidance and litigates cases. Watson v. Commissioner is the canonical case where a $24k salary on a $200k+ profit was reclassified..
Common practical approach:
- Pay yourself 40-60% of net income as salary, take the rest as distribution.
- Document that the salary is comparable to market rate for your role and hours.
- Keep records: BLS wage data for your job, salary surveys, comparable hires you would make to replace yourself.
- Run payroll regularly (monthly or biweekly), not in a year-end lump.
Section 4 · The QSBS exception (when C-Corp wins)
One situation where a C-Corp makes sense for a solo operator: if you are building a company to sell or take public, a C-Corp structured as a Qualified Small Business may exclude up to $10 million in capital gainscapital gainsThe profit from selling an asset for more than you paid for it. Taxed differently depending on how long you held the asset. (or 10x basis, whichever is greater) from the sale under IRC Section 1202 verify×DON'T TRUST, VERIFYClaim: QSBS allows up to $10M capital-gains exclusion under IRC Section 1202.Verify at: IRC Section 1202 (qualifying small business stock) ↗Section 1202 exclusion is per-issuer per-shareholder; some states do not conform..
QSBS requirements (highlights):
- Must be a domestic C-Corp.
- Must hold the stock for over 5 years before sale.
- The corporation must be an active business in a qualifying industry (most service businesses are excluded; tech, manufacturing, retail typically qualify).
- The corporation must have aggregate gross assets of $50 million or less at the time the stock was issued.
- You must have acquired the stock at original issuance (not on the secondary market).
If you are planning an acquisition exit, consult a tax attorney about QSBS qualification before choosing a structure. The decision is worth seven figures of after-tax outcome on a successful exit. Service businesses (consulting, accounting, law, financial services) are explicitly excluded from QSBS.
Section 5 · How to set up each
File Articles of Organization with your state. Cost typically $50-$500 depending on state. Get an EIN from the IRS (free, online, takes 10 minutes). Open a business bank account. Some states require an annual report or franchise fee. Wyoming, Delaware, and New Mexico have low fees; California has the $800 minimum.
File Form 2553 with the IRS. Must be filed within 2 months and 15 days of the tax year you want it effective (relief is sometimes available for late filers via Rev. Proc. 2013-30). Set up payroll through Gusto, Rippling, ADP, or QuickBooks Payroll. File quarterly payroll taxes (Form 941). File annual W-2 for yourself and a Form 1120-S corporate return.
As an S-Corp owner you can contribute to a Solo 401(k) as both employer and employee. The employer contribution is based on W-2 wages (your reasonable salary), not on total distributions. This is a meaningful constraint vs sole-proprietor Solo 401(k) where the employer side is based on full self-employment net income. See /solo-401k/.
File Articles of Incorporation with your state. Most VC-backed startups incorporate in Delaware. Get an EIN. Issue stock to founders. Adopt bylaws. Hold annual meetings (or single-shareholder consent in lieu). File Form 1120 corporate return annually. Generally requires legal help; the QSBS qualification details are not DIY.
TCJA expiration warning. The QBIQualified Business Income (QBI)Income from a self-employed business or partnership that may qualify for a 20% tax deduction under current law.Full definition deduction (20% off qualified business income) is a TCJA provision scheduled to expire after 2025. If it expires, the S-Corp election break-even shifts because losing 20% of QBI on the distribution side reduces the relative tax savings. Re-run your analysis before the 2026 tax year. See /tcja-sunset/.
- IRS Form 2553 (S-Corp election) · irs.gov/forms-pubs/about-form-2553.
- IRS S-Corp Compensation and Medical Insurance Issues · irs.gov.
- IRC Section 1202 (Qualified Small Business Stock).
- California Franchise Tax Board, S-Corporation page · ftb.ca.gov.
- Watson v. Commissioner, 668 F.3d 1008 (8th Cir. 2012). Canonical reasonable-compensation case.
- IRS Solo 401(k) page · irs.gov.
Last updated 2026-04-25 · Not financial advice. Consult a CPA before electing.