Quick overview
Entity choice affects how profits are taxed, how you pay yourself, compliance workload, and opportunities for tax planning.
LLC taxation
- Default pass‑through: Income passes to owners and is taxed on their returns.
- Self‑employment tax: Active members generally pay SE tax on business profits.
- Flexible elections: An LLC can elect S‑Corp or C‑Corp treatment for tax.
Tip: Single‑member LLCs are disregarded for tax by default, but still provide legal separation under state law.
S‑Corp advantages & requirements
- Salary + distributions: Owners on payroll take a reasonable salary; remaining profits may avoid SE tax.
- Eligibility: U.S. entity, 100 or fewer shareholders, one class of stock, individuals/qualifying trusts as owners.
- Compliance: Payroll, officer compensation, and annual S‑Corp return.
C‑Corp pros & cons
- Flat corporate rate: Profits taxed at the corporate level.
- Double taxation risk: Dividends taxed again to shareholders.
- Planning levers: Retain earnings, employee benefits, equity incentives.
Side‑by‑side comparison
| Feature | LLC (default) | S‑Corp | C‑Corp |
|---|---|---|---|
| Taxation | Pass‑through | Pass‑through | Corporate |
| Self‑employment tax | Yes (active) | On salary only | No (but payroll taxes on wages) |
| Owner pay | Draws | Salary + distributions | Salary + dividends |
| Admin burden | Low | Medium (payroll) | Medium/High |
How to decide
- Estimate profits and your target salary.
- Model payroll taxes vs. SE tax.
- Consider future funding, equity, and exit plans.