When forming an LLC in the United States, many entrepreneurs think the hard part is over. But one crucial decision remains: How should your LLC be taxed? Two popular options are electing to be taxed as an S Corporation (S Corp) or a C Corporation (C Corp). Both have advantages—but choosing the wrong one can cost you in taxes and complexity.
This guide breaks down the differences to help you make the best choice for your business.
What Do S Corp and C Corp Mean for an LLC?
By default, an LLC is taxed as a sole proprietorship (for one member) or a partnership (for multiple members). But the IRS allows LLCs to elect corporate taxation—either as an S Corp or C Corp—by filing specific forms:
- Form 2553 to elect S Corp taxation
- Form 8832 to elect C Corp taxation
These elections don’t change your LLC’s legal structure—only how it is treated for tax purposes.
Key Differences Between S Corp and C Corp Taxation
1. Double Taxation vs Pass-Through Taxation
- C Corp: Profits are taxed at the corporate level, and again when distributed to owners (double taxation).
- S Corp: Profits pass through to the owners’ personal tax returns, avoiding double taxation.
✅ Winner for small business owners: S Corp
2. Self-Employment Tax
- LLCs taxed as Sole Proprietorships or Partnerships pay 15.3% self-employment tax on all profits.
- S Corps allow you to pay yourself a “reasonable salary” (subject to payroll tax), and take the rest as distributions, which are not subject to self-employment tax.
✅ S Corp often results in lower overall taxes—especially for businesses earning $60K+ in profit.
3. Flexibility and Growth
- C Corp: Easier to issue stock, attract investors, and scale globally.
- S Corp: Limited to 100 shareholders, and all must be U.S. citizens or residents. No foreign ownership.
✅ C Corp is ideal for startups planning to raise venture capital.
4. Administrative Burden
- S Corp and C Corp: Both require strict formalities, including corporate bylaws, meetings, and payroll reporting.
- Default LLC: Fewer administrative requirements.
🚫 If you’re not ready for extra paperwork, staying with default LLC taxation may be better.
Summary: S Corp vs C Corp at a Glance
| Feature | S Corp | C Corp |
|---|---|---|
| Taxation | Pass-through | Double taxation |
| Owner Type Limitations | U.S. citizens/residents only | No restrictions |
| Shareholder Limit | 100 maximum | Unlimited |
| Ideal For | Profitable small businesses | Scalable startups |
| Self-Employment Tax Saving | Yes | No |
| Ability to Attract Investors | Limited | High |
When Should an LLC Elect S Corp Taxation?
n LLC Elect S Corp Taxation?
You should consider the S Corp election if:
- You make more than $60,000 in net annual profit.
- You want to reduce self-employment taxes.
- You don’t plan to raise outside capital from investors.
When Should an LLC Elect C Corp Taxation?
C Corp may be the better fit if:
- You want to raise funding from VCs or angel investors.
- You’re planning to go public someday.
- You prefer to reinvest profits into the business and benefit from the flat 21% corporate tax rate.
Final Thoughts
There’s no one-size-fits-all answer when choosing between S Corp and C Corp taxation for your LLC. It depends on your goals, profit levels, and growth plans. The right choice can optimize your tax liability and simplify your future fundraising.
If you’re unsure, consult with a qualified tax advisor—or reach out, and I’ll help you break it down based on your situati