LLC vs Corporation Taxes: Complete 2026 Comparison
The tax treatment difference between LLCs and corporations can mean tens of thousands of dollars annually. Here's how to choose the right structure for your situation.
Tax Treatment at a Glance
| Aspect | LLC (Default) | C-Corporation |
|---|---|---|
| Tax Structure | Pass-through | Double taxation |
| Business Tax Rate | None (owner pays) | 21% federal |
| Owner Tax Rate | Personal rate (10-37%) | 15-20% dividends |
| Self-Employment Tax | Yes (15.3%) | No (salary only) |
| QBI Deduction | Up to 20% | No |
| Loss Deduction | Against other income | Carried forward |
LLC Tax Advantages
1. Pass-Through Taxation
LLC profits pass directly to owners' personal tax returns. No separate business tax return means simpler filing and no double taxation.
2. Qualified Business Income (QBI) Deduction
Through 2025 (possibly extended), LLC owners can deduct up to 20% of qualified business income. This effectively lowers your top marginal rate.
3. Loss Pass-Through
Business losses flow to your personal return, potentially offsetting other income like wages or investment gains.
4. Tax Classification Flexibility
Single-member LLC = sole proprietorship taxation
Multi-member LLC = partnership taxation
File Form 2553 = S-Corp taxation
File Form 8832 = C-Corp taxation
C-Corporation Tax Advantages
1. Low Flat Rate
The 21% corporate tax rate (post-TCJA) benefits high-earning businesses. If your personal rate is 32-37%, corporate taxation might save money.
2. Retained Earnings
Corporations can keep profits within the company for reinvestment. This defers owner taxation until dividends are distributed.
3. Fringe Benefits
C-Corps can deduct 100% of health insurance, life insurance, and other fringe benefits for owner-employees.
4. Lower Dividend Rates
Qualified dividends are taxed at 0%, 15%, or 20%—potentially lower than ordinary income rates for high earners.
The S-Corp Sweet Spot
Both LLCs and corporations can elect S-Corp taxation. This hybrid offers:
- No self-employment tax on distributions: Only your reasonable salary pays Social Security/Medicare
- Pass-through taxation: Avoid corporate double taxation
- QBI deduction: Still available on distributions
Example: $200K profit as single-member LLC = $30,600 self-employment tax
Same $200K as S-Corp (reasonable salary $100K) = $15,300 self-employment tax
Annual savings: $15,300
When to Choose Each Structure
Choose LLC (Default Taxation) When:
- Low to moderate profits (under $100K)
- You want maximum simplicity
- You have other income to offset with losses
- You're in a low tax bracket
Choose C-Corporation When:
- High profits with low distribution needs
- You plan to retain earnings for growth
- You want deductible fringe benefits
- You're seeking venture capital investment
Choose S-Corp (LLC or Corp) When:
- Profits exceed $60-80K annually
- You can justify a reasonable salary
- You want self-employment tax savings
- You don't need retained earnings
The Bottom Line
Most small businesses benefit from LLC with S-Corp election. The self-employment tax savings alone often justify the extra filing requirements. But if you're building for acquisition or VC funding, C-Corp remains the standard.
Run the numbers with a CPA before electing. The wrong choice costs thousands annually.