A plain-English breakdown of how LLCs, S-Corps, and C-Corps actually differ — sourced directly from the IRS, SBA, and Texas Secretary of State — so you can talk to your CPA or attorney with the right questions.
Choosing a business structure affects your taxes, your paperwork, and how much personal liability protection you have. But there's a piece of this decision that trips up almost every small business owner: "LLC," "S-Corp," and "C-Corp" aren't three parallel options. They're two different kinds of things.
This guide untangles that confusion and walks through what each structure actually means for a small business, using only definitions and figures that come directly from the IRS, the SBA, and Texas state agencies.
An LLC is a legal entity you form under state law. An S-Corp and a C-Corp are federal tax classifications — not separate things you form at the state level. You file paperwork with your state to create an LLC or a corporation. Only afterward do you (optionally) tell the IRS how you want that entity taxed. A corporation is taxed as a C-Corp by default; an LLC or a corporation can elect S-Corp tax treatment by filing IRS Form 2553. Source: IRS — Limited Liability Company (LLC) and IRS — S Corporations.
| Feature | LLC | S-Corp Election | C-Corp (Default) |
|---|---|---|---|
| What it is | State-law legal entity | Federal tax election on an LLC or corporation | Default federal tax status of a corporation |
| Liability protection | Yes — separate from the owner's personal assets, in most instances | Same as the underlying LLC or corporation | Yes — separate legal entity |
| How profit is taxed | Pass-through to owners (default) | Pass-through to shareholders | Taxed at the entity, then again on dividends |
| Self-employment / payroll tax | 15.3% SE tax on net earnings | Payroll tax on reasonable salary only | Payroll tax only on actual employee wages |
| Ownership limits | None | Max 100 shareholders; U.S. individuals, certain trusts/estates only | None — any number, foreign or entity shareholders allowed |
| Stock/ownership structure | Membership interests, no stock | One class of stock only | Multiple classes allowed |
Sources: SBA — Choose a Business Structure, IRS — S Corporations, IRS — Forming a Corporation.
A Limited Liability Company (LLC) is "a business structure allowed by state statute," formed by filing with your state's business-filing agency — in Texas, the Secretary of State. Owners are called members, and most states, including Texas, allow a single-member LLC.
Source: IRS — LLC Filing as a Corporation or Partnership.
Under default LLC taxation, net earnings from self-employment are subject to self-employment (SE) tax of 15.3% — 12.4% for Social Security (up to the annual wage base, $184,500 for 2026) plus 2.9% for Medicare, which has no cap. This applies to the owner's full share of net earnings, whether or not it's actually distributed in cash. It's the main reason profitable LLC owners look at an S-Corp election. Sources: IRS — Self-Employment Tax, Social Security Administration — 2026 wage base.
An S-Corporation is not a separate legal entity — it's a federal tax election under Subchapter S of the Internal Revenue Code, made by an eligible LLC or corporation. Electing S-Corp status changes how the IRS taxes the business; it does not change the underlying legal structure you formed with the state.
Per the IRS, to qualify for S-Corp status, an entity must:
Source: IRS — S Corporations.
File IRS Form 2553 no more than 2 months and 15 days after the start of the tax year the election should take effect, or at any time during the preceding tax year. For a typical calendar-year business, that generally works out to mid-March — but the exact date depends on when the entity's tax year actually begins, so check the current Form 2553 instructions rather than assuming March 15 applies to your situation. Missed the deadline? Late-election relief may be available under Revenue Procedure 2013-30 if you can show reasonable cause.
If you work in the business, the IRS requires you to pay yourself a reasonable salary — as a W-2 employee, subject to payroll tax — before taking additional profit as distributions. There's no fixed percentage or formula; the IRS applies a facts-and-circumstances test based on what someone in your role, industry, and region would typically be paid. If you underpay your salary and lean heavily on distributions instead, the IRS can reclassify those distributions as wages and assess back payroll taxes, interest, and penalties. Source: IRS — S Corporation Employees, Shareholders and Corporate Officers.
A C-Corporation is the default federal tax status for a corporation — a legal entity that is separate from its owners, files its own tax return, and pays its own income tax. Any corporation is taxed as a C-Corp unless it validly elects S-Corp status.
Sources: IRS — Forming a Corporation, SBA — Choose a Business Structure.
If profit is being reinvested in the business rather than distributed, it's only taxed once, at the flat 21% corporate rate — which can be lower than an owner's personal income tax bracket at higher income levels. C-Corps are also the standard structure for businesses planning to raise venture capital or eventually go public, since investors typically require stock classes and cap-table flexibility that LLCs and S-Corps don't offer.
| Tax Aspect | LLC (Default) | S-Corp Election | C-Corp |
|---|---|---|---|
| How profit is taxed | Pass-through to owners | Pass-through to shareholders | Entity-level tax, then dividend tax |
| Business tax return | Schedule C (single-member) or Form 1065 (multi-member) | Form 1120-S | Form 1120 |
| Self-employment / payroll tax | 15.3% SE tax on all net earnings | Payroll tax on reasonable salary only | No SE tax; standard payroll tax on W-2 wages |
| Federal entity tax rate | N/A (pass-through) | N/A (pass-through) | Flat 21% |
| Feature | LLC | S-Corp Election | C-Corp |
|---|---|---|---|
| Number of owners | Unlimited | Max 100 shareholders | Unlimited |
| Owner citizenship/residency | No restriction | Shareholders generally must be U.S. citizens or residents (individuals, certain trusts/estates) | No restriction |
| Stock classes | No stock — membership interests | One class only | Multiple classes allowed |
| Typical fit for outside investors | Generally not preferred by VCs | Generally not preferred by VCs | Standard structure for VC-backed companies |
The core mechanism to understand: under default LLC taxation, self-employment tax applies to all of your net earnings from the business, whether you take the cash out or leave it in the business. Under an S-Corp election, payroll tax applies only to the salary you actually pay yourself — additional profit taken as a distribution is not subject to SE or payroll tax (though it's still subject to ordinary income tax). That gap is the entire reason the S-Corp election exists as a tax-planning tool.
On the C-Corp side, the double-taxation mechanism is: the corporation pays the flat 21% federal rate on its taxable income, and then a shareholder pays tax again — at qualified dividend rates, generally 0%, 15%, or 20% depending on their income — on any amount actually distributed as a dividend. Profit that's reinvested rather than distributed is only taxed once, at the corporate level.
Sources: IRS — Self-Employment Tax, IRS — Forming a Corporation, IRS Topic No. 404 — Dividends.
Owners of pass-through businesses (LLCs, S-Corps, and most sole proprietorships) may also qualify for the Qualified Business Income (QBI) deduction — up to 20% of qualified business income. This deduction was made permanent by the 2025 One Big Beautiful Bill Act and now includes a minimum deduction (a floor) for taxpayers who meet a minimum income test. Income earned through a C-Corp does not qualify for QBI. Because QBI meaningfully changes the comparison, it's worth factoring in before deciding — with your CPA, not a rule of thumb. Source: IRS — Qualified Business Income Deduction.
There's no single profit number where an S-Corp election automatically "pays for itself" — it depends on your income, your state, payroll costs, and what a reasonable salary looks like for your role. That said, the general shape of the decision looks like this:
✅ You want the simplest structure to run and maintain
✅ You're a freelancer, consultant, or early-stage business
✅ Profit is modest or inconsistent, so added payroll complexity isn't worth it yet
✅ You want maximum flexibility in how profit is allocated among owners
✅ You have owners who are not U.S. citizens or residents (a disqualifier for S-Corp status)
✅ The business is consistently profitable enough that payroll-tax savings on distributions would outweigh added payroll and compliance costs
✅ You have 100 or fewer shareholders, all U.S. individuals (or qualifying trusts/estates)
✅ You don't need multiple classes of stock
✅ You're comfortable running payroll and paying yourself a defensible, reasonable salary
✅ You're an owner-operated service business or professional practice
✅ You plan to raise venture capital or outside equity investment
✅ You want multiple classes of stock (e.g., for investors vs. founders)
✅ You have or expect foreign investors
✅ You're reinvesting most profit in the business rather than distributing it
✅ You plan to offer employee stock options or eventually go public
Most small businesses start as a simple LLC, then elect S-Corp tax treatment once profit and payroll capacity justify it. A later conversion to a C-Corp — common before institutional VC funding — is also possible. The right structure today doesn't have to be the right structure forever; it's a decision worth revisiting as the business changes.
Earlier guidance required most new LLCs and corporations to file a Beneficial Ownership Information (BOI) report with FinCEN. That changed. Per FinCEN's current guidance, following a March 26, 2025 interim final rule, all entities created in the United States — and their beneficial owners — are now exempt from the BOI reporting requirement. Only certain entities formed outside the U.S. and registered to do business here remain in scope. Because this is an interim rule that FinCEN has indicated it may finalize or revise, always check the current status directly at fincen.gov/boi before assuming it does or doesn't apply to your business.
Because Akili Bookkeeping works with Houston-area businesses, here's what's specific to forming and maintaining any of these structures in Texas.
The Texas Secretary of State charges $300 to file a Certificate of Formation — the same fee whether you're forming an LLC (Form 205) or a for-profit corporation (Form 201). Credit card payments carry an additional 2.7% statutory convenience fee.
Sources: Texas SOS — Form 205 Instructions (LLC), Texas SOS — Form 201 Instructions (Corporation).
Texas franchise tax is a state-level privilege tax on entities formed or doing business in Texas — it applies to LLCs and corporations whether or not you've elected S-Corp status, because Texas taxes the entity type, not the federal tax classification. For the 2026 report year:
If your revenue is under the no-tax-due threshold, you don't owe franchise tax — but you generally still must file a Public Information Report (PIR) for a corporation or LLC (or an Ownership Information Report for certain other entities). Skipping this filing can eventually lead to forfeiture of your right to do business in Texas. Verify your specific filing obligation directly with the Comptroller before your May 15 deadline.
Sources: Texas Comptroller — Franchise Tax, Texas Comptroller — Franchise Tax Forms.
Just starting out? An LLC gives you liability protection immediately, with the least paperwork.
Consistently profitable? Talk to a CPA about whether an S-Corp election makes sense for your specific numbers — the payroll-tax mechanism is real, but so is the added compliance cost, and the break-even point is different for every business.
Raising outside investment? Most investors expect a C-Corp; this is usually decided in conversation with an attorney as part of the fundraising process, not chosen speculatively in advance.
Whatever you choose, this decision has real, ongoing tax and compliance consequences — it's worth a conversation with a CPA or attorney who can look at your specific numbers rather than general rules of thumb.
This guide is based entirely on current official government sources. For the most current information, always check these directly:
This guide provides general information only and is not legal or tax advice. Tax law changes frequently — the figures above (including wage bases, franchise tax thresholds, and QBI rules) are current as of the "last verified" date at the top of this page but are adjusted periodically. Always verify current requirements at the official sources linked above, and consult a licensed CPA or attorney about your specific situation before making an entity decision.
Akili Bookkeeping works with Houston-area small businesses on exactly this kind of decision — and keeps your books clean no matter which structure you choose.
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