LLC vs. S-Corp vs. C-Corp: Tax Implications for US Small Businesses
Choosing the right entity structure affects self-employment tax, qualified business income deductions, and investor readiness. Here's how the numbers compare.
Single-member LLC (default: disregarded entity)
Income flows to Schedule C. All net profit — not just salary — is subject to 15.3% self-employment tax (SE tax) on the first $168,600 (2024) and 2.9% above that. Simple to operate, but tax-inefficient once net profit regularly exceeds $80,000.
S-Corp election
An LLC or corporation electing S-Corp treatment splits income into reasonable salary (subject to payroll tax) and distributions (not subject to SE tax). On $200,000 net profit with a $100,000 salary, the SE tax savings can exceed $15,000 annually. Requires payroll, quarterly 941s, and more bookkeeping overhead.
C-Corp
Subject to a flat 21% federal corporate tax. Dividends are taxed again at the shareholder level (qualified dividend rate). Generally unfavorable for small profitable businesses unless raising venture capital or retaining significant earnings at the entity level for investment.
Qualified Business Income (QBI) deduction
Pass-through entities (LLCs, S-Corps) may deduct up to 20% of qualified business income under IRC §199A. The deduction phases out for specified service businesses (consulting, law, finance) above certain income thresholds. Clean books and accurate profit categorization are required to substantiate the deduction.
Which structure to choose
For most solo operators under $80,000 net profit: single-member LLC on Schedule C. Above $80,000 and stable: evaluate an S-Corp election with your CPA. Planning to raise equity funding: C-Corp (Delaware). The breakeven math changes every year — reconciled books make the comparison concrete.
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