Key takeaways
- An LLC is a legal wrapper. Its tax treatment is a separate choice you can change.
- An S-Corp election can cut self employment tax once profits are high enough to justify payroll.
- A C-Corp faces double taxation but fits businesses that reinvest profits or raise outside capital.
Business owners often pick a structure once, at formation, and never revisit it. But the right choice depends on how much you earn, whether you reinvest, and where you are headed. Here is the plain English version.
The LLC: a flexible default
An LLC is a legal structure, not a tax status. By default, a single member LLC is taxed as a sole proprietorship and a multi member LLC as a partnership, with profits passing through to your personal return. That simplicity is why it is the most common starting point, and all of the profit is subject to self employment tax.
The S-Corp election: cutting self employment tax
An LLC or corporation can elect to be taxed as an S-Corp. You pay yourself a reasonable salary, which is subject to payroll taxes, and take the rest as distributions, which are not subject to self employment tax. Once profits are high enough, that split can save a meaningful amount each year.
The C-Corp: double taxation, with a purpose
A C-Corp pays tax at the corporate level, and shareholders pay again on dividends. That double taxation sounds bad, but the structure suits businesses that reinvest profits, plan to raise venture capital, or want certain stock based benefits. For many funded startups, it is simply a requirement.
When it makes sense to switch
The usual path is to start as an LLC and elect S-Corp status once profit crosses the point where the tax saved beats the added cost. Moving to a C-Corp is less common and usually driven by fundraising rather than tax. The key is to run the numbers for your specific profit and salary before you file any election.
A note on New Jersey
State rules layer on top of the federal picture. New Jersey has its own filing requirements and minimum taxes that can change the math, so the best structure on paper federally is not always the best once state tax is included. This is where a preparer who knows both matters.
Frequently asked questions
Is an LLC taxed differently from an S-Corp?
An LLC is a legal structure, not a tax status. By default a single member LLC is taxed as a sole proprietorship and a multi member LLC as a partnership. An LLC can also elect to be taxed as an S-Corp, which can reduce self employment tax once profits are high enough.
When does an S-Corp election start to save money?
The S-Corp election tends to pay off once your business profit is high enough that the payroll and compliance costs are outweighed by the self employment tax you save on distributions. The exact break even depends on your reasonable salary and profit, which is worth modeling before you elect.
Why would anyone choose a C-Corp if it is double taxed?
C-Corps face tax at the corporate level and again on dividends, but they suit businesses that reinvest profits, plan to raise venture capital, or want certain stock based benefits. For many startups the structure is a requirement of their investors.
Not sure which structure fits your business?
We handle entity formation and business returns, and we will model the numbers before you decide.
Talk to a specialist