S Corp vs LLC vs C Corp: How to Choose the Right Structure

Selecting the optimal legal structure for your new business isn't just tedious paperwork. It is one of the first strategic decisions you'll make, and the implications are far-reaching, shaping how your operations will be taxed, protected, and funded for years to come.

So, which legal entity is the best for your small business?

Choosing the right entity for your business isn't easy, as confusion surrounds each option and the long-term impact on numerous aspects of your business.

In this guide, we compare S corp vs C corp vs LLC entities so you can make a confident, potentially future‑proof decision. Understanding their strengths and differences is crucial for optimizing financial outcomes and ensuring compliance with relevant regulations.

This S Corp vs LLC vs C Corp guide covers:

• How each entity is taxed, their tax advantages, including self‑employment taxes and double taxation

• Personal liability protection

• Ownership rules and fundraising flexibility

• Administrative and compliance burdens

• Practical next steps: formation, elections, and staying compliant

Understanding the Core Entities: LLC, S Corp, and C Corp Defined

Limited liability company (LLC): The hybrid model

An LLC combines the personal‑asset protection of a corporation with the pass‑through taxation sole proprietors and partnership owners depend on. Small business owners and entrepreneurs appreciate the lighter formalities, flexibility, and tax benefits from the outset.

For example, a business that formed as an LLC can also elect to be taxed as an S corp or C corp, which can unlock savings when your profit grows. Some owners start as an LLC, then file IRS Form 2553 within 75 days to elect S corp tax treatment once profits justify payroll.

While LLCs offer limited liability protection (LLP) and simplicity, the choice of how it's taxed is a critical decision point where professional analysis, such as that provided by the small business experts at 1-800Accountant, can maximize tax efficiency.

S Corporation (S Corp): Pass-through with corporate formalities

An S corp is a tax election, not a separate legal entity type. Like a standard LLC, profits and losses are passed through to S corp shareholders, so there is no corporate income tax or federal income tax.

S corps must meet specific rules and requirements to qualify, including:

• Having no more than 100 shareholders, all U.S. citizens taxpayers or certain trusts.

• Only one class of stock.

• Owner‑employees must take a reasonable salary that is subject to payroll taxes.

The "reasonable salary" S corp owner-employees can take must be based on similar compensation in your state and industry. There are benefits to taking a reasonable salary, including the reduction of your self-employment tax burden.

Payroll and self-employment taxes can be complex and confusing without professional help.    Specialized payroll and tax advisory services from 1-800Accountant ensure compliance and optimization for your type of business, regardless of entity selection.

C Corporation (C Corp): The standard for scalability and investment

A C corp is a separate legal entity that offers the strongest liability shield and unlimited stock classes. That makes it popular with investors and startups planning to go public. While there are many benefits to forming as this entity, there is a well-known downside: double taxation. When profits are taxed at the corporate level and again when distributed as dividends, this constitutes double taxation. 

C corp owners and entrepreneurs manage these complexities and challenges through strategic tax planning, often with the assistance of professionals, such as reinvesting profits or paying deductible salaries and benefits.

S Corp vs LLC vs C Corp: How Taxation Works

Pass-through taxation: The LLC and S Corp advantage

LLCs, by default or by S corp election, pass business income, deductions, and credits straight to owners’ personal income tax returns. Pass-through taxation allows these entities to avoid paying corporate income tax, making it a popular feature.

Structures featuring pass-through taxation can be particularly beneficial for many small to medium-sized businesses, but require diligent personal and business tax integration, which can be time-consuming and complex.

Full-service business tax preparation and filing from 1-800Accountant ensures accuracy and maximizes savings for entities featuring pass-through taxation. 

C Corporation and double taxation

C corps pay tax on net profits at a 21% rate. When money is distributed as dividends, shareholders pay individual tax, which is known as double taxation. 

Certain circumstances make this acceptable from a strategic tax standpoint, including:

• Reinvesting profits

• The availability of certain deductions for C corps

C corporations can benefit from year-round support for tax purposes to explore strategies for mitigating the impact of double taxation, including: 

• Salary

• Benefits

• Entity restructuring analysis 

Optimizing self-employment taxes: S Corp edge vs standard LLC taxation

Active LLC members usually owe the 15.3% self‑employment tax that funds Social Security and Medicare taxes on all net profits. S corps owners working in the business must be paid a "reasonable salary," subject to payroll taxes. In contrast to LLCs, the remaining S corp profits can be dividend distributions that are not subject to self-employment tax.

This difference can lead to significant tax savings for certain businesses and is often cited as a key driver for LLC owners to elect S corporation status, guided by tax professionals.

The LLC's unique tax flexibility: Electing your tax status

An LLC offers incredible flexibility in how it is taxed, and can choose to be taxed as: 

• A sole proprietorship

• Partnership

• S corp

• C corp

The entity you select to form as is a decision should be taken seriously, as it impacts long-term tax liability and compliance. Tailored guidance and advice from 1-800Accountant can help model outcomes of each election before you make a selection. 

Liability, Ownership, and Administrative Load for Different Business Structures

Personal Asset Protection

LLCs, S corps, and C corps generally provide a shield protecting owners' personal assets from business debts and lawsuits.

It's critically important, for S corps and C corps in particular, to maintain corporate formalities, such as separate finances and record-keeping, to ensure this liability shield remains intact. Full-service bookkeeping from 1-800Accountant can handle this important process on behalf of your business. 

Ownership flexibility and restrictions

These entity-level rules can impact fundraising capabilities and succession planning, warranting strategic advice before you make a selection for your business. 

• LLC: Unlimited members and is the most flexible entity; can include other entities and foreign owners

• S corp: Up to 100 U.S. individual shareholders; one class of stock

• C corp: Unlimited shareholders of any type; multiple stock classes

Compliance and administrative responsibilities

You will have ongoing compliance and administrative responsibilities to address, whichever entity you select for your business. 

• LLCs typically have simpler ongoing compliance requirements, such as fewer mandated meetings and less extensive record-keeping, although state requirements vary.

• S corps and C corps face more stringent administrative hurdles, such as adopting bylaws, holding regular board and shareholder meetings, maintaining meeting minutes, and more complex tax filings, compared to other entities.

Comprehensive, tax-deductible services from 1-800Accountant can alleviate this burden and ensure ongoing compliance, including: 

• Business tax preparation filing 

• Payroll

• Year-round tax advisory

Aligning Structure with Business Goals and Operations

Long-term business aspirations: Growth, funding, and exit strategies

If you aim for venture capital or an IPO, consider forming as a  C corp. If you plan to stay lean or family‑owned, an LLC or S corp often offers better tax flexibility and fewer formalities for busy owners to manage.

It's essential to align the structure with your business's trajectory, which is a key component of proactive tax planning and advisory.

"Reasonable salary" and S Corporations

A "reasonable salary" should be reflective of norms in your state and industry. Underpay yourself and risk penalties. Overpay and lose tax savings.

Avoid IRS scrutiny with an integrated payroll solution and quarterly CPA check‑ins to help you identify your "reasonable salary." 

Initial setup vs future restructuring

Converting from your chosen entity to another later on is possible, but not optimal, as each change incurs costs in terms of both money and time, potentially disrupting your operations.

It's best to make an informed initial choice, which can be achieved with professional business formation guidance, saving time and resources. Business owners who trust professionals with their entity selection often receive recommendations for LLC formation due to initial simplicity and asset protection, with a strategic S corp election (within 75 days) if beneficial for tax savings.

Formation, Elections, and Staying on Track: Practical Next Steps

Entity formation

Leveraging proprietary technology and professional expertise during formation can ensure your business is set up for optimal tax efficiency from inception.

These are the broad steps you'll take to make your business entity selection official: 

1. Choose a state and file Articles of Incorporation or Organization.

2. Get a free EIN from the IRS.

3. Draft an Operating Agreement or Bylaws.

4. Open dedicated business bank accounts.

S Corp election (Form 2553)

File IRS Form 2553, Election by a Small Business Corporation, within 75 days of formation or within two months and 15 days after the start of the tax year to gain S corp status.

Failing to meet the S corp election deadlines can have significant tax consequences. Sidestep missed deadlines completely by embracing valuable guided S corp election processes with the help of tax professionals.

Ongoing compliance

You must address these obligations to ensure ongoing compliance, including: 

• Monthly bookkeeping and reconciliations

• Quarterly estimated taxes

• Annual returns (1120‑S, 1065, or 1120)

• Payroll tax deposits and filings

• State franchise or excise taxes where required

Affordable, full-service bookkeeping and tax solutions, along with Client Portal access, from 1-800Accountant provide peace of mind and ensure your business stays current and compliant year-round.

Preparing for audits and keeping up with tax laws

The IRS has increased its attention on pass-through entities, raising concerns about additional audit notices. While the IRS can send your business an audit notice even if you're doing everything right, this additional scrutiny underscores the importance of being prepared.

Comprehensive audit defense from 1-800Accountant ensures you are supported if and when a notice arrives. Another way to minimize audit threats is to stay updated on tax law changes, such as debates over taxes in 2025. Tax advisory solutions help your business navigate and adapt to ever-changing tax laws. 

Maximizing Your Structure: The Role of Professional Financial Partnership

When it comes to the selection and management of your business entity, you can roll the dice yourself and hope for the best, or you can operate with certainty with tax professionals at your side. The right financial firm for your business moves beyond mere compliance to offer proactive tax planning aligned with your long-term business growth goals. It is essential that they have the capacity, experience, and expertise to address all of your financial needs, including: 

• Bookkeeping

• Payroll

• Tax preparation and filing 

• Tax advisory

This ensures seamless data flow and a holistic financial strategy for your business.

When you trust your complex entity selection and financial work with 1-800Accountant, America's leading virtual accounting firm, our tax specialists can analyze your specific business needs and recommend the optimal structure and ongoing strategy for maximum savings and compliance, considering everything from entity structuring to loan agreements.

This frees you to focus on your next business milestone while we handle your complex financial and tax work. Schedule a quick consultation—usually 30 minutes or less—to learn how we can help your business flourish with affordable, tax-deductible entity formation and financial services. 

Conclusion: Charting Your Course with Confidence

Whichever entity you select, there are potential tradeoffs and obligations that you must be familiar with and ready to address. There is no one-size-fits-all best entity selection. The "best" choice is highly individualized and depends on specific business goals, financial situations, and operational plans.

When deciding which entity to choose, keep in mind: 

• LLCs offer simplicity and tax flexibility.

• S corps cuts self‑employment taxes when the salary is set correctly.

• C corps make raising capital easier, but add double taxation and more paperwork.

Choosing your business structure is a foundational step. 1-800Accoutant's team of expert CPAs, EAs, and tax professionals offers personalized guidance, from formation and tax election to ongoing bookkeeping, payroll, and strategic tax advisory, ensuring your business is structured for optimal savings and growth from the start.