Starting a business is exciting — but picking the wrong structure can cost you thousands in taxes, liability, or future growth headaches. For entrepreneurs in the U.S. in 2025, the main options boil down to three:
- LLC (Limited Liability Company)
- S Corporation (S-Corp)
- C Corporation (C-Corp)
Each has unique advantages, tax treatments, and paperwork. Choosing the right one depends on your business goals, how you plan to pay yourself, and whether you expect to raise outside funding.
Let’s break it down in plain English.
LLC: The Flexible Favorite
What is an LLC?
An LLC is the simplest way to protect your personal assets while running a business. It creates a legal separation between you and your company. If the business gets sued or goes into debt, your personal house and savings are generally safe.
Pros of an LLC
✅Simple and flexible: Few formalities. No annual shareholder meetings or detailed minutes required.
✅Pass-through taxation: Profits “pass through” to your personal tax return. No separate business tax at the federal level.
✅Protects personal assets: Shields your house, car, personal bank accounts from most business debts and lawsuits.
✅Can have unlimited owners (members): Good for partnerships.
Cons of an LLC
🚫Self-employment tax hit: By default, all profits are subject to 15.3% self-employment taxes (Medicare + Social Security).
🚫Can look less impressive to investors: Venture capital prefers corporations for stock issuance.
S-Corp: Tax Efficiency for Small Businesses
What is an S-Corp?
S-Corp is not actually a type of company. It’s a tax election you make with the IRS. Both LLCs and corporations can file to be taxed as an S-Corp.
Why elect S-Corp status?
✅Avoid full self-employment tax: Only the salary you pay yourself is subject to Social Security + Medicare taxes. Additional profits (distributions) are not, which can save thousands.
✅Still pass-through: Avoids the double taxation of C-Corps. Profits show up on your personal return.
Requirements & Drawbacks
🚫 Must pay yourself a “reasonable salary,” which means extra payroll paperwork.
🚫 Limits on who can own shares (U.S. citizens, max 100 shareholders, one class of stock).
🚫 More IRS scrutiny.
C-Corp: For Big Growth & Investors
What is a C-Corp?
A traditional corporation. Unlike LLCs or S-Corps, a C-Corp pays taxes on its profits directly (currently a flat 21% federal rate). Then if it pays you dividends, you pay tax again.
Why Choose a C-Corp?
✅Attract investors: Venture capital and angel investors usually demand C-Corps for stock options and preferred shares.
✅Easier to go public or offer employee stock plans.
✅Potential tax planning: If you keep profits in the company, the 21% tax may be lower than your personal bracket.
Downsides
🚫Double taxation: Company pays taxes, then you pay again on dividends.
🚫 More complex record-keeping, boards, shareholder meetings.
Quick Comparison Table
Feature LLC S-Corp C-Corp Taxes Pass-through Pass-through (with split between salary & dividends) Corporate tax + personal dividend tax Self-employment taxes Full Only on salary N/A (pay yourself W-2 or dividends) Owners Unlimited Max 100, U.S. only Unlimited, any nationality Attracting investors Harder Harder Easiest Complexity Easiest Moderate (payroll + IRS scrutiny) Most complex
Real-World Scenarios
Example 1: Freelancer or solo entrepreneur
An LLC taxed normally is usually best. Keeps things simple, protects personal assets, and avoids corporate complexities. You just pay self-employment taxes.
Example 2: Small but growing business
Start as an LLC, then file an S-Corp election once you’re making ~$60,000+ net profits. Why? Because after paying yourself a reasonable salary, the leftover profits can be distributed without 15.3% payroll taxes. This often saves thousands.
Example 3: Startup seeking investors
Go straight to a C-Corp (often in Delaware). Investors expect it, stock options are easier to issue, and it sets you up for a possible IPO or acquisition.
Can You Change Later?
Yes. Many businesses start as an LLC, then switch tax treatment or restructure.
- LLC can elect S-Corp status anytime (by filing Form 2553 with IRS).
- LLC can also convert to a C-Corp if you later seek venture funding.
- C-Corps can’t easily switch to an S-Corp if they’ve taken on foreign investors or issued multiple stock classes.
So start with the simplest structure that fits your goals now.
Key Legal Paperwork for Each
✅LLC: File Articles of Organization with your state + Operating Agreement.
✅S-Corp: File above + IRS Form 2553.
✅C-Corp: File Articles of Incorporation, adopt bylaws, issue stock, and hold annual meetings.
Costs
Filing fees vary:
- LLCs: ~$50–$500 depending on state.
- C-Corps: Similar to LLCs, but more annual formalities.
- S-Corps: Same entity costs as LLC or Corp, plus extra tax filing costs.
Bottom Line: How to Decide
✅LLC: Best for solo businesses, freelancers, partnerships, rental properties.
✅S-Corp: Perfect for profitable small businesses that want tax savings on distributions.
✅C-Corp: Essential for startups seeking VC money or planning public offerings.