LLC vs. S-Corp vs. C-Corp: Which Entity Structure Saves the Most Tax?

Default Treatment: Sole Proprietorship and Single-Member LLC

Without any election, a single-member LLC is a "disregarded entity" — taxed exactly like a sole proprietorship. All net profit flows to Schedule C and is subject to both income tax AND self-employment tax (15.3% on the first $176,100, 2.9% above that in 2025). There is no salary/distribution split.

At $100,000 net profit, SE tax alone is approximately $14,130. This is the baseline to beat with any entity structure.

S-Corporation: The SE Tax Optimizer

An S-Corp does not pay entity-level income tax (pass-through). But it allows the owner-employee to split profit into two buckets:

• Salary (W-2): Subject to FICA/SE tax. Must be "reasonable compensation" per IRS guidelines.
• Distribution: Not subject to SE tax — only income tax

Compliance cost: ~$1,000–$3,000/year for payroll service + Form 1120-S. Net savings at $150K: approximately $7,000–$9,000/year.

C-Corporation: When It Wins

A C-Corp pays a flat 21% federal income tax on retained earnings. This beats the individual top rate of 37% — making C-Corps attractive for businesses that retain and reinvest profits rather than distributing them. Key C-Corp advantages:

• 21% flat rate on retained earnings: Any profit left in the company is taxed at 21% — not passed through to the owner at 37%
• QSBS eligibility (IRC §1202): Shareholders can exclude up to $10M in capital gains on exit — only available to C-Corp stockholders
• Investor-friendly: VCs require C-Corp structure; S-Corp shareholder limits (100 shareholders, US citizens only, one class of stock) prohibit institutional investment
• Deductible fringe benefits: Health insurance, educational assistance, dependent care — deductible at entity level and not includable in shareholder income (unlike S-Corp 2%+ shareholders)

C-Corp trap: If profits are ultimately distributed as dividends, double taxation applies (21% corporate + up to 23.8% dividend rate = effective rate up to ~44%). C-Corps work best for businesses that reinvest profits or plan an exit with QSBS treatment.

Decision Framework

• Under $50K net SE income: Sole prop / single-member LLC — compliance costs exceed SE tax savings
• $50K–$500K, no investors, no exit planned: S-Corp — best SE tax efficiency, pass-through simplicity
• Seeking venture investment or planning $10M+ exit: C-Corp (Delaware) — QSBS + investor compatibility
• High earner retaining profits, no outside investors: C-Corp may win on retained earnings rate differential
• Real estate or partnership: LLC taxed as partnership — flexibility, step-up in basis at death, no S-Corp restrictions