LLC vs S-Corp vs C-Corp: Best Business Structure for Taxes

Choosing the Right Business Structure ,  Without the Headache

Starting or growing a business comes with a lot of decisions, but few have more long-term impact than choosing the right business structure. LLC, S-Corp, Sole Proprietorship, C-Corp… the options can feel like alphabet soup. And let’s be honest, most business owners aren’t tax strategists (nor should they have to be).

Yet, this choice can directly affect:

• How much you pay in taxes

• Whether your personal assets are protected

• The paperwork (and stress) you’ll deal with

• And how much money you get to keep

The problem? Most people either default to the “easiest” setup… or rely on outdated advice that doesn’t serve them anymore.

That’s where this guide comes in.

In this article, we’ll break down:

• The major business structure types (Sole Prop, LLC, S-Corp, and C-Corp)

• The key pros and cons of each

• How they affect your taxes

• And how to figure out what’s right for you, now and as you grow

Not sure which one fits your situation? Schedule a free consultation with Trustway Accounting, we’ll help you get set up the right way from the start.

No jargon. No stress. Just clear, expert advice to help you build with confidence.

Business Structures Explained

Before we dive into tax strategies, let’s clarify what each structure actually is, and why it matters. Each business entity comes with its own rules for liability, taxes, and compliance. Below is a breakdown of the most common options for small business owners.

Sole Proprietorship

This is the most basic business structure, and it’s the default. If you’ve started offering services or selling products under your own name without registering an official business entity, you’re likely operating as a sole proprietor (even if you didn’t know it).

 Pros: Why Some People Choose Sole Proprietorship

Easiest and cheapest to set up
There’s no formal registration required in most states. Often, you just need a business license or a DBA (“Doing Business As”) if you’re using a different name.

Example: Jane starts a virtual assistant business from home. She doesn’t register anything officially, she’s automatically a sole proprietor.

No separate business tax return
You don’t have to file a separate tax return for the business. Instead, all income and expenses are reported on Schedule C of your personal tax return.

Example: If you earn $50,000 as a freelance graphic designer, you report that income right on your Form 1040, no extra corporate tax forms.

Minimal paperwork
No bylaws, meetings, or annual filings. You can run your business without a lot of red tape.

Tip: Just keep good records of your income and expenses, something as simple as a spreadsheet or accounting software can work.

Cons: Why It Might Not Be the Best Long-Term

No legal separation between you and your business
You and your business are legally the same. If your business gets sued or owes money, your personal assets (like your home or savings) could be at risk.

Example: A client claims your service caused financial damage and files a lawsuit. If you're a sole proprietor, they can go after your personal bank account or property.

Limited tax flexibility
Sole proprietors can’t choose how they’re taxed, you’re automatically subject to self-employment taxes on all your profits (which includes Social Security and Medicare).

Example: On $100,000 of profit, you’ll pay income tax plus around $15,300 in self-employment taxes (as of 2025 rates). No way to split income like with an S-Corp.

Can look less “official” to clients or partners
Some clients may prefer working with an LLC or Corporation, especially for B2B services. It’s about perception, an official entity can feel more “established.”

Example: A corporate client asks if you're incorporated before signing a contract. Being just a sole proprietor might raise red flags or cause delays.

LLC (Limited Liability Company)

An LLC blends the simplicity of a sole proprietorship with the liability protection of a corporation. It’s one of the most flexible and popular options for small businesses. Many new business owners form an LLC without realizing there’s a key difference between a Single-Member and a Multi-Member LLC. Here’s what you need to know before making your decision.

Understanding the Difference Between Single-Member and Multi-Member LLCs

When setting up an LLC, one of the first questions you'll answer is: how many people will own the business?

That simple detail whether you’re the only owner or sharing it with others affects how your business is taxed and what paperwork you’ll need to file. Let's break down both types in plain language.

Single-Member LLC (SMLLC)

A Single-Member LLC is exactly what it sounds like: an LLC with just one owner.

• Owned by one person or entity
  This could be a solo business owner, a freelancer, or even another company that owns the LLC.

• Treated as a “disregarded entity” for tax purposes
  That means the IRS doesn't tax the LLC separately. Instead, it treats the business and the owner as the same person—for tax purposes only.

• Reports income on personal tax return using Schedule C
  All the profits or losses from the business are reported on a form called Schedule C, which is included in your personal tax return. There’s no separate business tax return required.

• Still offers liability protection
  Even though taxes are filed personally, the business itself is legally separate from you. This helps protect your personal assets—like your home or bank account—if the business is ever sued or goes into debt.

Educational Example:
Sarah runs a social media consulting business by herself. She forms a Single-Member LLC. When tax season comes, she simply adds her business income and expenses to her personal tax return. If a client ever tried to sue her business, her personal savings would be protected under the LLC.

Multi-Member LLC (MMLLC)

A Multi-Member LLC is an LLC that has two or more owners. These owners are called “members.”

• Owned by two or more people (or companies)
  The owners can be individuals, other businesses, or a mix of both.

• Automatically taxed as a partnership (unless you choose differently)
  The IRS treats a Multi-Member LLC as a partnership by default. That means the business itself doesn’t pay income taxes—instead, profits and losses pass through to the owners.

• Must file a separate tax return (Form 1065)
  Even though the business doesn’t pay tax directly, it must file a partnership return using IRS Form 1065. This form reports how much money the business made and how much goes to each owner.

• Each owner receives a Schedule K-1
  Each member gets a K-1 form, which shows their share of the business’s profit or loss. They use this form to report their portion of the income on their own personal tax return.

Educational Example:
Jake and Lisa co-own a small graphic design firm. They form a Multi-Member LLC. Each year, their accountant files Form 1065 for the business. Jake and Lisa each get a Schedule K-1 showing 50% of the profits, and they include that info when filing their personal taxes.

Differences at a Glance

Choosing the right version of an LLC can save you time, money, and confusion. Let us help you get it right from day one. Schedule your free consultation with a Trustway advisor today.

Pros of an LLC

• Personal liability protection
  Unlike a sole proprietorship, an LLC is legally separate from you. This means your personal assets (like your home or savings) are typically protected if your business is sued or goes into debt.
  Example: A customer trips on your property and sues the business. If you're an LLC, only business assets are at risk, not your personal bank account.

• Pass-through taxation
  By default, an LLC doesn’t pay federal income taxes as a separate entity. Profits and losses "pass through" to your personal tax return, avoiding double taxation.
  Example: If your LLC earns $80,000 in profit, you report that income on your personal return and pay taxes as if you earned it yourself.

• Flexible management structure
  LLCs aren’t required to have boards of directors or hold formal meetings. You can run your business your way with minimal formalities.
  Example: A husband-and-wife team forms an LLC for their cleaning service. They run operations casually without needing corporate minutes or shareholder votes.

• Tax election options (including S-Corp)
  An LLC can choose to be taxed as an S-Corp by filing IRS Form 2553. This can lead to significant tax savings depending on your income level.
  Example: A consultant earning $100,000 through an LLC elects S-Corp status and pays themselves a $50,000 salary, potentially reducing self-employment tax on the rest.

Cons of an LLC

• More setup and admin than sole proprietorship
  While easier than a corporation, forming an LLC still requires paperwork, filing fees, and possibly an operating agreement depending on your state.
  Example: Example: To form an LLC in Alabama, you must file a Certificate of Formation with the Secretary of State and pay a state fee of $200. You’ll also need to obtain a Business Privilege License and file an initial Business Privilege Tax Return.

• Still subject to self-employment tax (unless S-Corp election is made)
  By default, all profits are subject to self-employment taxes, just like a sole proprietorship.
  Example: An LLC with $90,000 in net income pays approximately $13,770 in self-employment tax unless it elects to be taxed as an S-Corp.

S-Corporation (S-Corp)

An S-Corp is not a legal business structure but a special tax classification that certain LLCs or corporations can elect with the IRS. It’s often used as a tax strategy by profitable small businesses.

Pros of an S-Corp

• Pass-through taxation with payroll flexibility
  Like an LLC, an S-Corp avoids double taxation. However, the IRS allows owners to split income between salary and distributions, reducing self-employment taxes.
  Example: A business owner earns $120,000 in profit. Instead of paying self-employment tax on the full amount, they pay themselves a $60,000 salary (taxed normally) and take $60,000 as a distribution (not subject to self-employment tax).

• May reduce self-employment tax
  By separating your income, you only pay payroll taxes on your “reasonable salary,” not the full profit.
  Example: A freelance marketer switching from LLC to S-Corp status saves around $6,000 per year in self-employment tax by adjusting how income is reported.

• Still provides liability protection
  Just like an LLC, an S-Corp shields your personal assets from business liabilities.
  Example: If a vendor sues your business, your personal property is generally protected, provided you’ve kept personal and business finances separate.

Cons of an S-Corp

• Must pay a “reasonable salary”
  Owners of the S-Corp who work in the business must also be employees of the business. You’re legally required to run payroll and pay yourself a wage appropriate for your role, which means registering with a payroll system and handling employment tax filings.
  Example: A web designer operating as an S-Corp must run payroll for themselves, even if they’re the only employee.

• More IRS rules and restrictions
  S-Corps can only have 100 or fewer shareholders, and all must be U.S. citizens or residents. You also can’t have different classes of stock.
  Example: A partnership with foreign investors would not qualify for S-Corp status.

• Additional filing requirements and paperwork
  You must file an S-Corp election (Form 2553) and prepare separate corporate tax filings (Form 1120S), including issuing W-2s and K-1s.
  Example: Compared to a standard LLC, an S-Corp might require help from a payroll service and accountant to stay compliant.

Wondering if your business qualifies or if an S-Corp election would pay off? Schedule a discovery call to run the numbers with a pro.

C-Corporation (C-Corp)

A C-Corp is a completely separate tax and legal entity from its owners. While it’s the default form of corporation, it’s typically used by startups, businesses seeking outside investors, or those that plan to grow large.

Pros of a C-Corp

• Strong liability protection
  Owners’ personal assets are generally protected from legal or financial claims against the business.
  Example: A software company facing a lawsuit has its risk contained within the corporation, owners' homes and bank accounts are protected.

• Separate entity for tax purposes
  The business itself pays corporate income taxes. Owners are only taxed when they take dividends or salaries.
  Example: The company reports $200,000 in earnings and pays a corporate tax rate on it. Shareholders only pay personal taxes if profits are distributed.

• More opportunities for benefits and reinvestment
  A C-Corp can offer more fringe benefits (like health insurance or retirement plans) and reinvest profits into the business more flexibly.
  Example: A founder pays themselves a modest salary and uses the rest of the profit to hire, market, and expand.

• Ideal for raising capital and issuing stock
  Venture capitalists and angel investors typically prefer C-Corps because they can own stock and benefit from growth.
  Example: A tech startup forms a C-Corp to issue stock options and attract outside investors.

Cons of a C-Corp

• Subject to double taxation
  The corporation pays taxes on its profits, and then shareholders pay taxes on any dividends received.
  Example: The company pays 21% on profits, and the owner pays additional income tax on dividends received from those same profits.

• Complex formation and compliance
  Requires articles of incorporation, bylaws, regular board meetings, and more recordkeeping.
  Example: Unlike an LLC, a C-Corp must hold formal annual shareholder meetings and maintain corporate minutes.

• More expensive to maintain
  Legal, accounting, and filing costs are generally higher than for LLCs or S-Corps.
  Example: Filing state-level annual reports, paying corporate franchise taxes, and hiring a CPA to manage corporate returns can add up fast.

Not sure if you need the benefits of a C-Corp or if it’s overkill? Let’s walk through your growth goals and find the right match.

Differences at a Glance

Choosing a business structure involves more than just taxes. Liability, setup cost, paperwork, flexibility, and future goals all play a role. The table below breaks down the most important differences between the four main options.

How Each Structure Affects Your Taxes

Your business structure doesn’t just influence legal protection, it also directly impacts how much you pay in taxes, when you pay them, and what strategies are available to reduce your tax bill.

Let’s break down how taxation works for each type:

Sole Proprietorship

• Taxed as personal income
  All business income is reported on your personal tax return using Schedule C.

• Full self-employment tax applies
  You're responsible for both the employer and employee portions of Medicare and Social Security (15.3% total).

• Limited tax strategy options
  You can deduct business expenses, but you can’t split income or defer taxes through other structures.

Example: A photographer earns $60,000 in net profit. They'll pay income tax based on their tax bracket plus $9,180 in self-employment tax.

LLC (Default Tax Status)

• Pass-through taxation
  The LLC itself doesn’t pay income tax. Profits pass through to the owner’s personal return.

• Full self-employment tax applies
  Just like sole proprietorships, all profit is subject to self-employment tax.

• More flexibility in deductions and expenses
  You can deduct a broader range of expenses and may have more credibility with the IRS than a sole proprietor.

Example: A cleaning business with $90,000 in profit will owe both income tax and about $13,770 in self-employment tax unless an S-Corp election is made.

S-Corporation

• Split income between salary and distributions
  Owners who work in the business must be on payroll, paying standard payroll taxes. However, remaining profit can be distributed and is not subject to self-employment tax.

• Can reduce self-employment tax burden
  This is one of the primary reasons many LLCs elect S-Corp status.

• Requires reasonable salary and payroll filings
  The IRS expects you to pay yourself fairly, too low and it may trigger an audit.

Illustrative Tax Savings Example: Electing S-Corp to Lower Tax Liability

A business earns $100,000 in profit.

• As an LLC: All $100,000 is subject to self-employment tax = approx. $15,300

• As an S-Corp: Owner pays themselves a $50,000 salary (taxed normally) and takes $50,000 in distributions (not subject to self-employment tax), potentially saving $7,650

Tax savings vary. We’ll help you analyze your income and determine whether an S-Corp election makes sense for your situation. Schedule a call for a one-on-one strategy session.

C-Corporation

• The business pays taxes directly
  C-Corps are taxed at a flat corporate rate (currently 21%), and then owners pay taxes again on dividends they receive.

• Double taxation is a factor
  You’re taxed twice if profits are distributed, but this can be avoided if profits are reinvested or retained.

• Potential for strategic benefits
  C-Corps may allow for more fringe benefits, profit retention, or deductions unavailable to pass-through entities.

Example: A C-Corp earns $150,000. It pays $31,500 in corporate tax. If it distributes the remaining $118,500 as dividends, the owner pays income tax on that distribution, too.

Common Scenarios & Recommendations

No two businesses are exactly alike. Your income, industry, growth plans, and comfort with complexity all influence what structure fits best. Here are some common situations and the structures that often make the most sense.

Scenario 1: A solo service provider just starting out

• Profile: A freelance web designer earning under $40,000/year.

• Needs: Simple setup, low cost, basic liability protection, flexibility.

Recommendation:
Start with an LLC for liability protection. Keep taxes simple at first (default pass-through taxation), then re-evaluate once income increases.

Why not Sole Proprietorship? It’s easy, but it offers zero protection if something goes wrong, too risky in today’s litigious environment.

Starting simple doesn’t mean staying stuck. Book a free consult to future-proof your setup now.

Scenario 2: A growing business earning $80K–$120K/year

• Profile: A marketing consultant with steady income and a small team of subcontractors.

• Needs: Lower self-employment taxes, personal asset protection, some admin support.

Recommendation:
Form an LLC and elect S-Corp status. This allows you to pay yourself a salary and take distributions, reducing self-employment taxes.

Why not stay an LLC without S-Corp? You’ll likely overpay in self-employment taxes once your profit hits six figures.

Not sure if the numbers work for you? Let’s run the projections. Schedule a tax strategy call.

Scenario 3: A startup seeking investment or big growth

• Profile: A software company building a scalable product and seeking venture capital funding.

• Needs: Ability to issue stock, attract investors, reinvest profits.

Recommendation:
Choose a C-Corp structure. It’s required by most investors and allows for stock-based compensation and reinvestment flexibility.

Why not an LLC or S-Corp? S-Corps can’t have foreign investors or multiple classes of stock. LLCs don’t support the scale or formal equity incentives investors expect.

Planning to raise capital? Let’s talk structure before you pitch. Book your planning session today.

Scenario 4: A hybrid business owner with W-2 income + a side hustle

• Profile: A nurse with a side income from consulting or coaching.

• Needs: Tax-efficient setup, low complexity, flexibility to grow.

Recommendation:
Start with an LLC, and once your side income grows beyond $50K+, consider S-Corp election to manage taxes more efficiently.

We help many professionals grow side businesses into something scalable, and smartly structured. Schedule a free consult to explore your options.

5. When & How to Switch Structures

Your business structure isn’t set in stone. As your income grows or goals change, your current setup may no longer be the most tax-efficient or legally protective. Here’s how to know when it’s time to switch, and what the process typically looks like.

When Should You Consider Switching?

• You’re earning over $60,000 in net profit
  At this level, switching from an LLC (or sole prop) to S-Corp can reduce self-employment taxes and increase take-home pay.

• You’re expanding your team or client base
  More complexity = more liability and more risk. An LLC or Corporation can help protect your personal assets and elevate your brand’s professionalism.

• You’re planning to seek investors or issue shares
  C-Corp structures are often necessary for startups that want to raise capital or offer stock options.

• You want to take advantage of better tax strategies
  Certain deductions, benefit plans, and retirement contributions are only available under S-Corp or C-Corp setups.

Not sure if it’s time to shift? We’ll walk you through it with a side-by-side comparison. Schedule a free entity review.

How to Switch from Sole Proprietorship to LLC

1. File Articles of Organization with your state.

2. Obtain an EIN (Employer Identification Number).

3. Update your business licenses, bank accounts, and contracts.

4. Start maintaining separate records for personal and business finances.

Example: A virtual assistant starts as a sole proprietor, then forms an LLC once income grows to $50K/year. This protects personal assets and creates a more credible business image.

How to Elect S-Corp Status as an LLC

1. Make sure your LLC meets IRS requirements.

2. File IRS Form 2553 (within 75 days of formation or Jan 1 of tax year).

3. Start payroll and determine a reasonable salary.

4. Begin filing Form 1120-S annually and issue yourself a W-2.

Example: A consultant earning $90,000 forms an LLC, then elects S-Corp. She pays herself a $50,000 salary and saves thousands in self-employment taxes on the rest.

How to Convert to a C-Corp

1. File Articles of Incorporation in your state (or convert your LLC if your state allows).

2. Create bylaws and appoint directors.

3. Set up a board and schedule regular meetings.

4. File IRS Form 8832 to be taxed as a C-Corp, if necessary.

Note: C-Corps require more documentation and administrative discipline, but they can unlock powerful growth and funding opportunities.

Transitioning doesn’t have to be stressful, especially when you have expert guidance. Let’s review your situation and create a smooth, compliant plan.

Conclusion: Get It Right the First Time

Choosing the right business structure is more than a checkbox, it can affect everything from your tax bill to your liability, brand credibility, and future growth potential.

Whether you're freelancing on the side, growing a service business, or launching a startup, the right entity choice can help you:

• Keep more of what you earn

• Stay protected legally

• Avoid surprises at tax time

• Grow confidently with clarity

But here’s the truth: most business owners either guess… or stick with whatever was “easy” when they started.

You don’t have to figure it out alone.

At Trustway Accounting, we help small business owners make the smartest financial decisions from the start.

Whether you’re starting fresh or thinking about switching, our team will guide you through the pros, cons, and tax impacts, so you can make the best decision for where your business is now and where it’s going.

Ready to make a confident choice? Schedule your consultation here

We’ll help you pick the right structure, and set it up the right way.