Income and career · Comparison

LLC vs S-Corp vs C-Corp.
Which structure actually saves money?

READ8 min·UPDATED·APPLIES TOUnited States·LEVELIntermediate
For self-employed earners deciding on a business/tax structure. Sources are listed at the bottom of the page; check their dates before acting.

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.

For most solo businesses earning under ~$40K–$60K in profit, a single-member LLC taxed as a sole proprietorship is the simplest and cheapest. Above ~$80K, an S-Corp election can save $5K–$15K/yr in 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 by splitting income into salary + distributions. C-Corp rarely makes sense for small businesses.

  • LLC = liability protection + pass-through taxation. The default for any solo business.
  • S-Corp election saves SE tax (15.3%) on the distribution portion of income. The breakeven is typically $40–$60K net profit outside California, $80K+ in California.
  • S-Corp requires "reasonable salary", the IRS will audit if you pay yourself $20K salary on $200K profit.
  • C-Corp: double taxation (corporate 21% + personal dividend rate). Only useful for retained earnings or VC fundraising.
  • State fees vary: Wyoming/Delaware/Nevada are popular for LLCs. Your home state may still require foreign registration.

This page covers US federal and state business-entity tax structures. Other countries have their own equivalents (Canadian CCPC, UK Limited Company, Australian Pty Ltd) with different tax mechanics.

Short answer

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.

On this page
  1. Section 1 · What each one is
  2. Section 2 · The S-Corp tax math
  3. Section 3 · The reasonable salary requirement
  4. Section 4 · The QSBS exception (when C-Corp wins)
  5. Section 5 · How to set up each

Section 1 · What each one is

LLC (LIMITED LIABILITY COMPANY)

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.

SOLE PROPRIETORSHIP (DEFAULT LLC TAX)

All net business income is subject to self-employment tax (15.3% on the first $184,500 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.

S-CORPORATION

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 federal payroll tax that funds Social Security and Medicare. Workers pay 6.2% for Social Security (on wages up to $184,500 in 2026) plus 1.45% for Medicare, and employers match both. Self-employed people pay both halves, 15.3%, as self-employment tax.Full definition). Profit above the salary is distributed and is NOT subject to self-employment tax. The tax savings come from the distribution portion.

C-CORPORATION

A separate legal entity with its own 21% flat federal corporate rate (post-TCJATax Cuts and Jobs Act (TCJA)The 2017 federal tax law that nearly doubled the standard deduction, capped the state and local tax (SALT) deduction at $10,000, and cut individual and corporate tax rates. In July 2025 the One Big Beautiful Bill Act made most of its personal cuts permanent and raised most filers' SALT cap to at least $40,000 through 2029.Full definition, permanent). Dividends paid to owners are taxed again at qualified-dividend rates (up to 20%, plus 3.8% NIIT). 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.

EXAMPLE · $150,000 NET BUSINESS INCOME

Without S-Corp (sole proprietor):

SE tax on $150,000 (15.3% on 92.35% of net earnings; below the $184,500 Social Security wage base and the Additional Medicare threshold): approximately $21,200 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).

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, or 1.5% of net income for S-Corps, whichever is greater ×DON'T TRUST, VERIFYClaim: California taxes S-Corps at 1.5% of net income, with an $800/yr minimum franchise tax.Verify at: FTB S-Corporation page ↗ Source 1 in the list belowCA 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

$40,000 NET INCOME
Savings ~$2,400. Within the $1,500-$4,000 operating cost range. Stay sole prop.
$80,000 NET INCOME
Savings ~$5,600. Worthwhile in most states.
$150,000 NET INCOME
Savings ~$10,000. Clearly worth it outside CA.

Approximate break-even: $40,000-$60,000 in net business income outside California. In California, the greater of the $800 minimum franchise tax or the 1.5% S-Corp tax pushes break-even higher (typically $80,000+).

S-Corp tax math, and when it pays
$150,000/yr net business income
Sole proprietor~$21,200 SE tax/yr
All $150,000 subject to SE tax
S-Corp$10,710 payroll tax/yr
$70,000 salary$80,000 distribution
$0$150,000/yr
Subject to SE or payroll taxDistribution, no SE tax
The $70,000/yr salary must be reasonable for the work.
Saving vs $1,500-$4,000/yr operating cost
$40,000/yr net~$2,400/yr, stay sole prop
$1,500/yr$4,000/yr
$80,000/yr net~$5,600/yr, worthwhile
$150,000/yr net~$10,000/yr, worth it
$0$10,000 saved/yr
Saving inside the $1,500-$4,000/yr rangeSaving clears the $4,000/yr high end
Operating cost: $500-$1,500/yr payroll processing plus $1,000-$2,500/yr added accounting. State fees come on top; California's $800/yr minimum franchise tax or 1.5% S-Corp tax, whichever is greater, pushes break-even higher, typically $80,000+.
A sole proprietor owes SE tax on all $150,000/yr; an S-Corp owner pays 15.3% only on the $70,000/yr salary, and the $80,000/yr distribution skips it. At $40,000/yr the ~$2,400/yr saving sits inside the $1,500-$4,000/yr operating cost, so stay sole prop; at $80,000/yr the ~$5,600/yr saving clears it in most states.

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 ×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 ↗ Source 2 in the list belowThe 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 $15 million ($10 million for stock issued on or before July 4, 2025) 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 ×DON'T TRUST, VERIFYClaim: QSBS allows up to $15M ($10M for stock issued on or before July 4, 2025) capital-gains exclusion under IRC Section 1202.Verify at: IRC Section 1202 (qualifying small business stock) ↗ Source 3 in the list belowSection 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 (stock issued after July 4, 2025 gets a 50% exclusion after 3 years and 75% after 4).
  • 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 $75 million or less ($50 million for stock issued on or before July 4, 2025) 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

LLC

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.

S-CORP ELECTION FROM LLC

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.

SOLO 401(K) WITH S-CORP

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 The Solo 401(k): Self-Employed Tax Power Move.

C-CORP

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.

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 is now permanent. The 20% QBI deduction (Qualified Business Income, IRC Section 199A) was originally a TCJA provision scheduled to expire after December 31, 2025. The One Big Beautiful Bill Act, signed July 4, 2025, made it permanent. The S-Corp election break-even math no longer has a 2025 cliff scenario; QBI stays at 20% on a permanent basis. See After OBBBA: What the 2026 Tax Code Looks Like.

RELATED PAGES
Gig Worker Finance · the broader self-employed playbook Solo 401(k) · max retirement savings Income Types · W-2 vs 1099 vs distributions After OBBBA · QBI permanent under OBBBA Tax Estimator · run both scenarios Tax Strategy · broader framework

Where to go from here

Do next

Solo 401(k)

Once the entity choice is made, this is the next self-employed tax lever to pull.

Read next

Self-Employed

The broader hub this entity decision sits inside: taxes, retirement, structure.

Explore further

Sources

Verify badges in the text link to these sources. Figures, rates and rules change: check each source’s date before acting on it.

  1. California Franchise Tax Board, S-Corporation page · ftb.ca.gov. ↩
  2. IRS S-Corp Compensation and Medical Insurance Issues · irs.gov. ↩
  3. Internal Revenue Service, IRC Section 1202 (qualifying small business stock) ↩
  4. IRS Form 2553 (S-Corp election) · irs.gov/forms-pubs/about-form-2553.
  5. IRC Section 1202 (Qualified Small Business Stock).
  6. Watson v. Commissioner, 668 F.3d 1008 (8th Cir. 2012). Canonical reasonable-compensation case.
  7. IRS Solo 401(k) page · irs.gov.

Last updated . Not financial advice. Consult a CPA before electing. Disclosures · How pages are reviewed

Subscribe via RSS for new articles.