LLC vs S-Corp vs C-Corp: Complete 2026 Comparison
Choosing the wrong business structure can cost you tens of thousands in taxes, expose your personal assets to liability, or block your fundraising ability. Here's the definitive side-by-side comparison for 2026.
Quick Answer: Most small businesses should start as LLCs. S-Corps make sense at $60K+ profit. C-Corps are for VC-backed startups planning to go public.
At a Glance: The Three Structures
| Feature |
LLC |
S-Corp |
C-Corp |
| Liability Protection |
✅ Yes |
✅ Yes |
✅ Yes |
| Tax Treatment |
Pass-through |
Pass-through + salary |
Double taxation |
| Self-Employment Tax |
15.3% on all profit |
15.3% on salary only |
N/A (employees) |
| Owners |
1+ |
1-100 |
Unlimited |
| Owner Types |
Anyone |
US citizens/residents only |
Anyone |
| VC Fundraising |
❌ Difficult |
❌ No |
✅ Yes |
| Annual Formalities |
Minimal |
Moderate |
Extensive |
| Formation Cost |
$50-500 |
$50-500 + election |
$50-500 |
| State Compliance |
Annual report |
Annual report + meeting |
Annual report + meeting |
Deep Dive: LLC (Limited Liability Company)
The LLC is the most flexible structure—like a Swiss Army knife for businesses.
How LLCs Work
LLCs combine the liability protection of corporations with the tax simplicity of sole proprietorships:
- Liability: Your personal assets (home, car, savings) are protected from business lawsuits
- Taxation: Business income "passes through" to your personal tax return
- Management: Run it however you want—no board meetings required
- Profit splitting: Divide profits however the operating agreement specifies
LLC Tax Example
Scenario: $100,000 profit, single-member LLC
| Tax Type |
Calculation |
Amount |
| Self-employment tax |
$100,000 × 15.3% |
$15,300 |
| Income tax (22% bracket) |
$100,000 × 22% |
$22,000 |
| Total tax |
|
$37,300 |
When to Choose LLC
- Profit under $60K/year
- Solo founder or small team
- Want maximum flexibility
- Not seeking VC funding
- International owners
- Real estate investments
Deep Dive: S-Corp (S Corporation)
S-Corps are LLCs or C-Corps that elect special tax treatment. The magic: you only pay self-employment tax on your salary, not your profit distributions.
How S-Corps Work
The S-Corp election creates two income streams:
- Salary: Subject to payroll taxes (15.3%) and income tax
- Distributions: Subject to income tax only (no payroll tax)
This split can save you thousands—but you must pay yourself a "reasonable salary" or the IRS will reclassify everything.
S-Corp Tax Example
Scenario: $100,000 profit, $60K salary, $40K distributions
| Tax Type |
Calculation |
Amount |
| Payroll tax (salary) |
$60,000 × 15.3% |
$9,180 |
| Income tax (total) |
$100,000 × 22% |
$22,000 |
| Total tax |
|
$31,180 |
| Savings vs LLC |
|
$6,120 |
Reasonable Salary Warning: If you pay yourself $20K salary on $100K profit, the IRS will audit you. Reasonable salary = what you'd pay someone else to do your job. In this example, $50-70K would be defensible for a skilled consultant.
S-Corp Requirements
- US citizens or residents only (no foreign owners)
- 100 shareholders maximum
- One class of stock only
- Must run payroll (quarterly filings)
- Annual shareholder meeting required
- Corporate formalities (minutes, resolutions)
When to Choose S-Corp
- Profit $60K+ per year
- Stable, predictable income
- US owners only
- Don't need multiple stock classes
- Can handle payroll complexity
- Self-employment tax savings > compliance costs
S-Corp Break-Even Analysis
Running payroll costs money. Here's when S-Corp makes sense:
| Profit |
LLC Tax |
S-Corp Tax |
Net Savings |
Worth It? |
| $40,000 |
$14,920 |
$12,480 |
$2,440 |
Borderline |
| $60,000 |
$22,380 |
$18,720 |
$3,660 |
✅ Yes |
| $100,000 |
$37,300 |
$31,180 |
$6,120 |
✅ Definitely |
| $200,000 |
$74,600 |
$62,360 |
$12,240 |
✅ Absolutely |
Assumes reasonable salary = 60% of profit, 22% income tax bracket, $1,200/year payroll costs
Deep Dive: C-Corp
C-Corps are separate tax entities—the business pays taxes, then you pay taxes again on dividends. But they're the only structure VCs will invest in.
How C-Corps Work
- Double taxation: Corporate tax (21%) + dividend tax (15-20%)
- Infinite owners: Unlimited shareholders, public trading possible
- Multiple stock classes: Common, preferred, with different voting rights
- Corporate formalities: Board of directors, annual meetings, extensive record-keeping
C-Corp Tax Example
Scenario: $100,000 profit, all distributed as dividends
| Tax Type |
Calculation |
Amount |
| Corporate income tax |
$100,000 × 21% |
$21,000 |
| Dividend tax (15%) |
$79,000 × 15% |
$11,850 |
| Total tax |
|
$32,850 |
This is worse than both LLC ($37,300) and S-Corp ($31,180)... for small businesses. But C-Corps have a secret weapon.
The C-Corp Advantage: Reinvestment
C-Corps only get taxed on profits that aren't reinvested. If you keep all $100K in the business:
| Structure |
Tax on $100K |
Cash Available to Reinvest |
| LLC |
$37,300 |
$62,700 |
| S-Corp |
$31,180 |
$68,820 |
| C-Corp (reinvested) |
$0 |
$100,000 |
For high-growth companies reinvesting everything, C-Corps can actually be cheaper.
When to Choose C-Corp
- Planning to raise VC funding
- Planning to go public (IPO)
- Reinvesting most profits for growth
- Want to offer stock options to employees
- International founders who can't do S-Corp
- Expecting massive growth (unicorn potential)
VC Requirement: If you're pitching VCs, they will almost certainly require you to be a Delaware C-Corp before investing. It's not optional.
Decision Framework
Choose LLC If:
- ✅ Profit under $60K/year
- ✅ Solo or small team
- ✅ No VC plans
- ✅ Want maximum simplicity
- ✅ Real estate business
Choose S-Corp If:
- ✅ Profit $60K+ per year
- ✅ US owners only
- ✅ Stable income
- ✅ Self-employment tax savings > $3K/year
- ✅ Can handle payroll complexity
Choose C-Corp If:
- ✅ Raising VC funding
- ✅ Planning IPO or acquisition
- ✅ Reinvesting 80%+ of profits
- ✅ Want employee stock options
- ✅ International founders
Can You Change Later?
Yes, but with caveats:
- LLC → S-Corp: Easy (file Form 2553 with IRS)
- LLC → C-Corp: Possible (taxable conversion)
- S-Corp → LLC: Allowed (but may trigger tax event)
- C-Corp → LLC/S-Corp: Very difficult (tax nightmare)
Strategy: Start as LLC. If profit crosses $60K, elect S-Corp status retroactively (IRS allows same-year elections). Only go C-Corp when VCs require it.
Common Mistakes
- Choosing C-Corp too early: VC dreams don't justify double taxation on $50K profit
- S-Corp with low profit: Payroll costs eat the savings under $40K profit
- Unreasonable salary: $20K salary on $150K profit = audit bait
- Ignoring state taxes: California's $800 franchise tax applies to all three
- Skipping operating agreement: 50/50 LLC without agreement = deadlock waiting to happen
- Foreign owner in S-Corp: Instant disqualification, back taxes owed
State-Specific Considerations
Your state matters almost as much as federal rules:
- California: $800 minimum franchise tax on all structures
- New York: S-Corps pay entity-level tax ($25-10,000)
- Texas: Franchise tax on LLCs and corps (0.375-0.75%)
- Delaware: No state income tax, popular for C-Corps
- Nevada/Wyoming: No state income tax, strong privacy
Cost Comparison
| Cost Category |
LLC |
S-Corp |
C-Corp |
| Formation |
$50-500 |
$50-500 |
$50-500 |
| Annual report |
$0-300 |
$0-300 |
$0-300 |
| Payroll service |
$0 |
$300-1,200 |
$300-1,200 |
| Registered agent |
$0-300 |
$0-300 |
$0-300 |
| Accounting/tax prep |
$500-1,500 |
$1,000-3,000 |
$1,500-5,000 |
| Total annual |
$500-2,300 |
$1,350-5,800 |
$1,850-7,300 |
The Bottom Line
For 90% of small businesses in 2026:
- Start as LLC — simplest, cheapest, most flexible
- Elect S-Corp when profit crosses $60K and savings > $3K/year
- Convert to C-Corp only when VCs require it (and they will)
Need Help Choosing Your Business Structure?
Clawporation provides LLC, S-Corp, and C-Corp formation services with expert guidance on which structure fits your business. We handle formation, compliance, and ongoing support.
View Formation Packages