LLC vs. S-Corp vs. C-Corp: Which Business Structure Is Right for You?

Choosing the right business entity is one of the most important decisions you will make as a business owner. The wrong choice can cost you thousands in taxes, limit your ability to raise capital, and create unnecessary personal liability.

Limited Liability Company (LLC)

**Tax Treatment**: By default, a single-member LLC is taxed as a sole proprietorship (Schedule C on your personal return) and a multi-member LLC as a partnership (Form 1065). LLCs can elect to be taxed as an S-corp or C-corp.

**Self-Employment Tax**: LLC members who are active in the business pay self-employment tax (15.3%) on all net income, up to Social Security wage base limits.

**Liability Protection**: Strong protection from business debts and lawsuits when properly maintained (separate accounts, no commingling).

**Flexibility**: Maximum operational flexibility — operating agreements can be customized to any arrangement the members agree on.

**Best For**: Small businesses, real estate investors, family businesses, businesses that don't need to raise institutional capital.

S Corporation

**Tax Treatment**: Pass-through entity — profits and losses flow through to shareholders' personal returns (no corporate-level tax). Shareholders who work in the business must receive a "reasonable salary" subject to payroll taxes.

**Self-Employment Tax Advantage**: The major tax benefit — distributions above the reasonable salary are not subject to self-employment tax. A business earning $200K net can pay $80K salary (FICA on $80K) and take $120K as a distribution (no FICA). Savings can be $10,000+ per year.

**Restrictions**: Max 100 shareholders; only US citizens/residents; only one class of stock; no institutional investors or other corporations as shareholders.

**Best For**: Profitable small businesses with consistent income where the owner-operator wants to minimize self-employment taxes.

C Corporation

**Tax Treatment**: Separate taxpaying entity. Income taxed at 21% corporate rate. Dividends also taxed at individual level when distributed ("double taxation").

**Raising Capital**: The only entity type that can easily raise institutional venture capital. VCs require C-corps (usually Delaware) because they need preferred stock, anti-dilution provisions, and eventual IPO flexibility.

**Employee Benefits**: C-corps can deduct more employee benefits (health insurance, group term life) at the corporate level.

**Best For**: Tech startups seeking VC funding; businesses planning an IPO; businesses with significant international operations.