LLC, S-Corp election, C-Corporation. The first two are the same entity taxed differently; the third is a different animal entirely. Set your net profit and watch the cheapest option change.
Created by Wyoming in 1977 and since adopted by every state, the LLC combines corporate limited liability with partnership taxation and flexibility. It has members rather than shareholders, runs on an operating agreement rather than bylaws, and can be managed by the members or by appointed managers.
By default a single-member LLC is disregarded and a multi-member LLC files as a partnership on Form 1065 with K-1s. Either can elect corporate treatment on Form 8832 or S-Corp treatment on Form 2553. In pass-through mode the entity itself pays no federal income tax.
Active members pay self-employment tax on their share of active income. The Section 199A qualified business income deduction can shelter up to 20% of pass-through income: made permanent by the 2025 tax act, though it still phases out for certain service businesses above the income thresholds.
The traditional American corporate form and the default treatment for any corporation that has not elected S status. A separate legal entity and a separate federal taxpayer, governed by a board elected by shareholders, with officers appointed to run operations.
It pays 21% federal corporate tax. When after-tax profit is distributed, shareholders pay again at 0%, 15% or 20% depending on income, plus 3.8% net investment income tax where applicable. State corporate tax ranges from nothing in Wyoming, Nevada, South Dakota, Texas and Washington to over 9% in California and New Jersey.
Qualified small business stock is the counterweight. Under Section 1202 as amended in 2025, stock issued after 4 July 2025 earns a tiered exclusion, 50% at three years, 75% at four, 100% at five, with the cap raised from $10m to $15m and the gross-asset limit from $50m to $75m.
Filed on Form 2553, available to both LLCs and corporations that qualify: all shareholders US citizens or residents, no more than 100 of them, and a single class of stock. Partnerships, most trusts and foreign persons are excluded.
It gives pass-through treatment like an LLC, but lets an active owner split profit between reasonable compensation, subject to payroll tax, and distributions, which are not.
Start with an LLC unless you are raising venture capital.
An LLC suits roughly 85% of new US businesses: solo founders, agencies, e-commerce, real estate, professional services, cash-flow operations. Add the S-Corp election once you consistently clear about $100,000 of net profit per owner.
Form a Delaware C-Corp from day one if you know you will raise institutional money, grant options, or target an acquisition. Converting later is routine but costs $3,000 to 10,000, and the QSBS holding clock only starts the day stock is issued.
The comparison above is federal and single-filer. Four things move it materially in real life.
Structure first, jurisdiction second. Delaware versus Wyoming is a $240-a-year question; this one is worth tens of thousands.
