How to Choose Between an LLC, S Corp, and C Corp

Start With How You Plan to Fund the Business

If you expect to raise money from venture capital funds, angel investors structured as funds, or eventually go public, a C corporation is almost always the right starting point, since institutional investors are structured to hold C corporation stock and typically won't invest directly in an LLC or an S corporation. If you're self-funding, using a small business loan, or raising money from individual investors who are comfortable with other structures, an LLC or S corporation stays on the table.

Compare How Each Structure Is Taxed

An LLC, by default, is taxed on a pass-through basis: a single-member LLC is disregarded and a multi-member LLC is taxed as a partnership, with profit reported once on the owners' personal returns. An S corporation also passes income through to shareholders, but it requires running payroll for any owner who works in the business, paying that owner a reasonable salary subject to payroll tax, with remaining profit distributed without self-employment tax. A C corporation pays its own flat 21% federal tax under 26 U.S.C. Section 11, and shareholders pay tax again only on profit actually distributed as a dividend, a pattern known as double taxation.

Check Whether Your Ownership Fits S Corporation Rules

Per IRS rules, an S corporation can have no more than 100 shareholders, who must be individuals, certain trusts, or estates; it can't have partnership, corporate, or non-resident alien shareholders, and it can issue only one class of stock. If your business wants outside investment from a fund, a corporate partner, or a foreign investor, S corporation status is off the table regardless of other factors, and a C corporation or a standard LLC are your remaining options.

Weigh Required Formality Against Simplicity

A C corporation, including one that's also elected S status, generally must maintain a board of directors, hold annual shareholder meetings, and keep minutes and bylaws, formalities most state LLC statutes don't require. An LLC's management and recordkeeping are set largely by its own operating agreement, with fewer state-mandated requirements, which is part of why many small businesses that don't need to raise institutional capital choose an LLC for its simplicity.

Consider Self-Employment Tax if You're Profitable and Active in the Business

If you're actively working in a profitable business and don't need outside investment, the choice often comes down to an LLC's default pass-through taxation, where you pay self-employment tax on all your profit, versus an S corporation election, where you split compensation between a reasonable salary and a distribution that avoids self-employment tax on that portion. This split only works within what the IRS considers reasonable compensation for the work performed, so the potential savings depend on your specific profit level and what a reasonable salary for your role would be.

Remember These Aren't Permanently Locked In

An LLC can elect S corporation tax treatment, using Form 2553, without changing its underlying legal structure or needing to convert to a corporation at all. A business that starts as an LLC or an S corporation and later needs to raise venture capital can convert to a C corporation, though the conversion involves its own filing, cost, and tax considerations. Choosing the structure that fits where your business is today, while understanding the path to change later, is usually more practical than trying to pick the structure that would fit every possible future scenario.

A Simple Way to Frame the Decision

If institutional fundraising or going public is a real plan, choose a C corporation. If you want maximum ownership flexibility with fewer required formalities and don't need S corporation's tax treatment, choose a standard LLC. If you're a profitable, closely held business with straightforward U.S.-individual ownership looking to reduce self-employment tax, consider an LLC or corporation with an S corporation election, after modeling the numbers with a tax professional.

Model the Numbers Before Choosing Based on Tax Alone

The self-employment tax savings an S corporation election can offer depend heavily on your specific profit level and what a reasonable salary for your role would cost to pay someone else to do. At lower profit levels, the cost of running payroll and filing a separate corporate return can outweigh the tax savings, so this is a calculation worth doing with a tax professional rather than assuming the election automatically helps.

State Treatment Doesn't Always Match the Federal Picture

Some states impose their own franchise tax or minimum fee on corporations, LLCs, or S corporations that doesn't track the federal tax treatment exactly, and a few states don't recognize the federal S election the same way. Check your specific state's treatment of each structure in addition to the federal comparison described here.

Your Choice Can Change as the Business Grows

A structure that fits a two-person consulting business doesn't necessarily fit the same business three years later with ten employees and a funding round in progress. Revisit the decision periodically rather than treating your original choice as permanent, particularly around a major milestone like taking on outside investors or profit growing substantially.

This Is Not Legal or Tax Advice

The right structure depends on your specific ownership plans, funding plans, and profit level. Talk to a business attorney and a tax professional before choosing or changing your structure, rather than relying on a general comparison alone.

Co-Founders Should Decide Together, in Writing

If you have co-founders, the entity choice affects everyone's equity, voting rights, and tax treatment, not just the person filing the paperwork. Document the agreed structure, ownership split, and any vesting terms in writing before filing, rather than relying on a verbal understanding that can be remembered differently once real money or disagreement is on the table.