LLC vs. S-Corp vs. C-Corp: How to Choose Your Business Entity in 2025

Founders ask this question more than any other: "Should I be an LLC or an S-Corp?"

The answer depends on your net profit, your state, and whether you want investors. Here's the framework I use with clients.

The 30-Second Decision Tree

Net profit < $40K?       → Single-Member LLC (taxed as sole prop)
Net profit $40K-$200K?   → LLC with S-Corp election
Net profit > $200K?      → S-Corp or C-Corp depending on growth plans
Plan to raise VC money?  → Delaware C-Corp
Multiple owners?         → Multi-Member LLC or S-Corp

Why the $40K Threshold Matters

Self-employment tax is 15.3% on the first $176,100 of net SE earnings (2025). That's Social Security (12.4%) + Medicare (2.9%).

As an LLC taxed as a sole prop, you pay SE tax on 100% of net profit.

Elect S-Corp status, and you pay yourself a "reasonable salary" (subject to FICA) plus take the rest as a distribution (NOT subject to SE tax).

Example: $150K net profit

• Sole prop / single-member LLC: SE tax ≈ $19,650 (15.3% on 92.35%)
• S-Corp with $90K salary, $60K distribution: payroll tax ≈ $13,770 + admin costs

Net savings: ~$5,000-$6,000/year, MINUS:

• S-Corp tax return prep: ~$1,200-$2,500
• Payroll service: ~$600-$1,200
• State franchise tax: $0-$800 (California is the worst)
• Time managing payroll

Below $40K profit, the overhead eats the savings.

"Reasonable Salary" — The Trap

The IRS has been auditing S-Corp owners aggressively since 2018 for setting salaries too low. Rule of thumb: 30-50% of net business income, benchmarked against what someone would pay an employee to do your job. Use BLS data, Glassdoor, or industry surveys.

Get this wrong and the IRS reclassifies distributions as wages, with back taxes + penalties.

When C-Corp Wins

Three scenarios:

1. You plan to raise venture capital. VCs typically only invest in Delaware C-Corps because of the well-developed corporate law and tax treatment of preferred stock.

2. QSBS (Section 1202). Founders of qualified C-Corps can exclude up to $10M or 10× basis of capital gains on sale, after holding stock for 5+ years. This is the single biggest tax break in the IRS code for founders.

3. Reinvestment-heavy businesses. If you're plowing every dollar back into the business and not taking distributions, the 21% flat C-Corp rate beats the 37% top individual rate.

State Considerations

• Delaware: Default for VC-backed companies. Strong corporate law (Court of Chancery), no state income tax on out-of-state income.
• Wyoming / Nevada: No state income tax, low filing fees. Good for solo operators.
• California: $800 minimum franchise tax + 1.5% S-Corp tax on top of federal. Painful but unavoidable if you operate there.
• Texas / Florida: No state income tax. Texas has a franchise tax but only above $2.47M revenue.
• New York: 6.5% corporate tax + city tax if NYC-based.

How to Make the Election

Form an LLC first in your home state. Then file:

• Form 8832 (entity classification election) if you want to be taxed as a corporation
• Form 2553 (S-Corp election) — must file within 75 days of formation OR by March 15 of the tax year

You can be an LLC legally and an S-Corp for tax purposes. Most active small business owners do exactly this.

When to Re-Evaluate

Run the numbers every year. If your business doubles, the right structure may change. The IRS allows S-Corp revocation, but you can't re-elect for 5 years afterward, so be deliberate.

What Accountaxed Does With This

When you set up your entity in Accountaxed's onboarding, the Tax Engine 2.0 automatically picks the right form:

• LLC / Sole Prop → Schedule C + Schedule SE
• S-Corp → Form 1120-S
• C-Corp → Form 1120 (21% flat)
• Partnership → Form 1065

And the audit grade flags issues specific to your entity type — like S-Corps where the owner-salary line is missing.

Set up your entity here →