Multi-Entity Comparison
C Corp vs S Corp vs LLC
The most common confusion in entity selection: LLC is a state-law entity, while C corp and S corp are federal tax classifications. An LLC may be taxed as a sole proprietorship, partnership, S corp, or C corp. The correct framing is "what state entity" + "what federal tax treatment".
Updated May 2026. Not tax advice.
The category error
"LLC vs S corp" is a malformed question.
An LLC may BE an S corp (for tax purposes) by filing Form 2553. The correct question is "LLC taxed as partnership vs LLC taxed as S corp" or "LLC vs corporation as state-law entity".
The check-the-box framework (IRC Section 7701)
Treasury Regulations under IRC Section 7701 establish the check-the-box rules: an unincorporated entity (LLC) may elect federal tax classification via Form 8832 (or Form 2553 for direct S corp election from LLC):
- Single-member LLC default: disregarded entity (income on owner's Schedule C)
- Multi-member LLC default: partnership (Form 1065)
- LLC + Form 8832 electing C corp: taxed as C corp (Form 1120)
- LLC + Form 2553 electing S corp: taxed as S corp (Form 1120-S)
The state-law entity (LLC) does not change. The federal tax treatment changes by election. Liability protection, operating agreement governance, state filing requirements, and registered agent rules remain LLC.
Source: 26 U.S.C. Section 7701; Treas. Reg. Section 301.7701-3.
The decision matrix
| Feature | LLC (default) | S Corp | C Corp |
|---|---|---|---|
| Entity vs election | State entity | Tax election | Default for corporations |
| Liability protection | Yes (state law) | Yes (if incorporated) | Yes (state law) |
| Federal tax default | Sole prop or partnership | Pass-through (after 2553) | 21% entity-level (no election) |
| Self-employment tax | Full 15.3% on net income (single-member) | Salary only | None on dividends |
| Ownership flexibility | Unlimited members, any type | 100 US-person limit | Unlimited, foreign OK |
| Stock/equity classes | Unlimited via operating agreement | One class only | Multiple stock classes |
| Special allocations | Yes (704(b) substantial economic effect) | No (pro-rata per share) | N/A |
| QSBS Section 1202 | Not eligible | Not eligible | Eligible (if active C corp) |
| QBI 199A deduction | Yes for owner | Yes for owner | No (entity-level) |
| Distribute appreciated property | Tax-free (731) | Gain triggered (311(b)) | Gain triggered (311(b)) |
When to pick each
LLC taxed as partnership or disregarded entity
For real estate, professional services with profit sharing, multi-member businesses with disproportionate contributions, and any business with appreciated property the owners may want to distribute. Special allocations and tax-free property distributions are the structural wins.
LLC or corporation taxed as S corp
For consistently profitable owner-operated businesses where net profit per owner exceeds ~$80k after reasonable salary. SE-tax savings on distributions above salary. No multi-class equity, no foreign owners, no plans to raise priced equity.
Corporation taxed as C corp
For VC-track startups (QSBS, preferred stock, ISO plans), foreign-owner businesses, multi-class capital structures, and certain retained-earnings strategies. Accept double tax in exchange for structural flexibility.
The most common path
For most US small businesses: form an LLC at the state level for liability protection and ease of state compliance. Start as default tax classification (sole prop or partnership). When net profit consistently exceeds $80k per owner, file Form 2553 to elect S corp tax treatment, without changing the state-law entity. Run payroll, take W-2 salary plus distributions, file Form 1120-S annually.
Sources
- 26 U.S.C. Section 7701 (check-the-box framework)
- IRS Form 8832 (Entity Classification Election)
- IRS Form 2553 (S corp election)
- IRS Publication 3402 (Taxation of LLCs)
Educational only. Entity and tax election choice has long-term consequences. Consult a CPA before deciding.