LLC vs Corporation: S Corp vs C Corp vs LLC

An LLC and a corporation both protect their owners from the business's debts, but they are built and taxed differently. A corporation has shareholders, a board of directors and officers, and by default pays a 21% federal income tax on its profit, with dividends taxed again to shareholders. An LLC has members, flexible management and pass-through taxation by default. An S corporation is not a third entity: it is a tax election either one can make.

So "S corp vs C corp vs LLC" is really two questions. Which entity do you form with the state, an LLC or a corporation? And how should that entity be taxed? This guide answers both, with a side-by-side table, the tax arithmetic, the paperwork each one carries, and the states where a corporation's yearly filing differs from an LLC's.

Three terms, two entities

LLC means limited liability company. It is formed under a state's LLC statute by filing articles of organization (a certificate of formation or organization in some states). People often say "limited liability corporation," but an LLC is not a corporation, and searching "limited liability corporation vs corporation" is really asking how an LLC compares with a corporation.

Corporation means an entity formed under a state's business corporation statute by filing articles (or a certificate) of incorporation. Its owners hold shares and elect a board of directors, which appoints officers to run the business.

C corporation is not a separate kind of entity; it is how the IRS taxes a corporation by default, under Subchapter C of the tax code. S corporation is the alternative under Subchapter S: an eligible corporation, or an eligible LLC, files Form 2553 and is taxed as a pass-through instead. Nothing about the state entity changes when it elects; an LLC taxed as an S corporation is still an LLC under state law.

LLC vs C corporation vs S corporation, side by side

How each one is taxed

LLC: pass-through by default

A single-member LLC is disregarded for federal income tax: its profit goes on the owner's Schedule C. A multi-member LLC is a partnership: it files a partnership return and each member reports a share. Either way there is one layer of federal income tax, paid by the owners at their own rates, and active owners pay self-employment tax on their share of profit. The LLC can change that by electing corporate or S corporation treatment.

C corporation: the 21% rate and the second layer

A C corporation is a taxpayer in its own right. IRS Publication 542 states it plainly: "Corporations, including qualified personal service corporations, figure their tax by multiplying taxable income by 21%." The corporation files Form 1120 and pays that tax before anything reaches the owners.

Then comes the second layer. In the IRS's words on its forming a corporation page, the profit of a corporation "is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax." The same page adds that the corporation "does not get a tax deduction when it distributes dividends to shareholders."

In round numbers, using the federal rate only: a corporation that earns $100,000 of taxable profit owes $21,000 in federal corporate tax and has $79,000 left. If it pays that out as dividends, the shareholders report it on their own returns and pay tax on it again. Under an LLC's default taxation the same $100,000 is taxed once, on the owners' returns. State corporate taxes, the owners' own brackets and the rates that apply to dividends all move the real figures, which is why the comparison is worth running with a CPA rather than from a rule of thumb.

The double tax is not the whole story. Owners who work in a C corporation are paid salaries, which the corporation deducts, so much of a small corporation's profit may never be taxed twice. Profit the corporation keeps to reinvest is taxed only at the corporate rate until it is paid out. That is why companies planning to reinvest everything, raise outside equity or eventually sell shares often choose a C corporation on purpose. The full IRS treatment is in Publication 542.

S corporation: one layer, with payroll

An S corporation pays no federal income tax at the entity level. It files Form 1120-S and each owner reports a share of profit on their own return, like a partnership. The difference from a default LLC is how owners are paid: owners who work in the business must take a reasonable salary through payroll, and the profit left after salary is distributed without Social Security and Medicare tax. That is where the saving comes from, and why the IRS watches salaries that look too low.

The election is due no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect. It is open to a corporation or an LLC that meets the small business corporation rules (the shareholder cap and one class of stock). When it pays off for an LLC, with a worked example, is in LLC vs S corp.

State taxes

States add their own layer, and it does not always follow the federal choice. S corporation status is not recognized at the entity level in the District of Columbia, Louisiana, New Hampshire, Tennessee and Texas, and New York requires its own state election. California charges an LLC an $800 annual tax, and an S corporation there pays an $800 minimum franchise tax, so electing does not avoid it. Texas's franchise tax applies to LLCs and corporations alike. Most states also tax a C corporation's income at the entity level, on top of the federal 21%, while a default LLC's income is taxed only on the owners' state returns.

Formalities: what each one has to keep up

A corporation runs on a fixed governance structure. Its statute expects bylaws, a board of directors that meets and records its decisions, shareholder meetings (most states call for an annual one), minutes of both, and a record of who holds which shares. Officers sign for the corporation under authority the board gives them. Skipping these is one of the ways owners lose the liability shield when a creditor asks a court to look through the company.

An LLC is lighter. Most state LLC statutes require no annual meeting, no board and no minutes; the members agree how the company is run in an operating agreement, and the statute fills any gaps. A few states do ask for more: in New York, for example, the state wants an LLC to adopt a written operating agreement (not filed) within 90 days after filing the Articles. Both structures share the rest: a registered agent, the state's report where one is required, a separate bank account, and books that keep the company's money apart from the owners'.

An S corporation election adds its own routine on top of whichever entity makes it: payroll for the working owners, quarterly payroll returns, W-2s, the Form 1120-S, and bookkeeping that separates salary from distributions.

State costs: where a corporation's yearly filing differs

Forming either entity costs a state filing fee. The LLC fee runs from $35 in Montana to $520 in Massachusetts; incorporation fees are set separately and in some states are lower than the LLC fee and in others higher. The bigger difference is often the yearly filing. In Alabama, Arizona, Missouri, New Mexico and South Carolina, an LLC files no annual report at all while a corporation does, and in Florida and Connecticut the corporation's report costs more ($150 a year against $138.75 a year in Florida; $150 a year against $80 a year in Connecticut).

When an LLC fits

• You are a solo owner or a small group running the business yourselves.
• You want one layer of tax by default and the option to elect S corporation treatment later.
• You want to split profit in ways that do not follow ownership percentages.
• You have, or may have, owners an S corporation cannot: another company or a non-US resident.
• You hold real estate or other appreciating assets, where the partnership rules usually fit better.
• You want the least paperwork that still separates the business from you.

When a C corporation fits

• You plan to raise money from venture investors, who usually expect preferred stock in a corporation.
• You want to grant stock options to employees under a standard plan.
• You intend to reinvest profit in the business rather than pay it out, so the second layer of tax is deferred.
• You expect many owners, owners of every kind, or a public listing someday.

When an S corporation election fits

• Profit is consistently well above what the working owners would reasonably be paid as salary.
• All the owners are US individuals, and ownership matches how profit is shared.
• The owners are willing to run payroll and file a separate return.
• The state follows the federal election, or its entity-level tax is small next to the saving.

Many owners start with an LLC because it keeps every door open: it can elect S corporation taxation without forming anything new, and it can elect C corporation taxation on Form 8832 if that ever makes sense. A CPA can confirm which tax treatment fits your numbers, and an attorney the entity, when investors or several owners are involved.

Can you change later?

Changing the tax treatment is the easy direction. An LLC elects a corporate or S corporation classification with an IRS form and keeps its state entity. Per the IRS list of when a new EIN is needed, changing the tax election to a corporation or an S corporation does not require one (details at llc-ein.com).

Changing the entity is a bigger step. Many states let an LLC become a corporation, or the reverse, through a statutory conversion or a merger filing, and some owners instead form the new entity and move the business into it. The IRS says a new EIN is needed when you terminate an existing LLC and form a new corporation. Converting a corporation into an LLC can be a taxable event for the corporation and its shareholders, so it is a step to plan with a CPA first.