"LLC", "S-corp" and "C-corp" are not three parallel choices. An LLC is a state-law legal structure. S-corp and C-corp are federal tax classifications. An LLC can be taxed as a sole proprietorship, partnership, S-corp or C-corp, and a corporation can choose to be an S-corp or remain a C-corp. Understanding that distinction makes the comparison much easier.
Quick comparison
| Feature | LLC (default) | S-corp | C-corp |
|---|---|---|---|
| Federal tax | Pass-through; owners report profit on their own returns | Pass-through; profit flows to shareholders | Company pays 21% federal tax; shareholders taxed again on dividends |
| Self-employment tax | Generally applies to owner's active profit | Owner salary is subject to payroll tax; distributions are not | Applies only to salary paid to employee-owners |
| Who can own | Anyone, including non-US persons | US citizens and residents only; up to 100 shareholders; one class of stock | Anyone, any number of shareholders |
| Paperwork | Light | Payroll, shareholder records, Form 1120-S | Heaviest: board and shareholder formalities, Form 1120 |
| Raising venture capital | Difficult | Not possible with non-US or entity investors | Standard |
The LLC
An LLC protects owners from personal liability for business debts and keeps administration simple. A single-member LLC is taxed as a "disregarded entity" by default, meaning profit is reported on the owner's personal return. A multi-member LLC is taxed as a partnership. The flexibility is the main attraction: you can change the tax treatment later through an election.
The S-corp election
An S-corp election (Form 2553) can lower self-employment tax for profitable owner-operators because only a "reasonable salary" is subject to payroll tax, with remaining profit taken as distributions. The IRS expects that salary to be genuinely reasonable for the work done, so the saving is not unlimited. S-corps require payroll, careful records and stricter ownership rules. Non-resident aliens cannot be S-corp shareholders, so this option is generally closed to non-US founders.
The C-corp
A C-corp is a separate taxpayer. It pays corporate tax at a flat 21% federal rate, and shareholders pay tax again when profits are distributed as dividends. In return, it offers the structure investors expect: multiple share classes, stock options for employees and no limits on who can own shares. For startups planning to raise venture funding, a Delaware C-corp is the norm. Founders may also benefit from special tax treatment of qualifying small business stock, subject to the current rules.
Which should you choose?
- US-resident solo owner, modest profit: LLC, taxed by default.
- US-resident owner with significant steady profit: LLC with an S-corp election, after modelling the payroll cost.
- Non-US founder running a lean business: LLC. See how to form one as a non-resident.
- Founder planning to raise venture capital: Delaware C-corp.
- Multiple owners with differing contributions: LLC taxed as a partnership, with a carefully drafted operating agreement.
Things people forget
- State taxes and fees apply on top of federal rules and vary widely.
- Converting between structures later can trigger tax and legal cost.
- Foreign-owned entities have extra filings regardless of structure. See our Form 5472 guide.
Not sure which fits? Our team can model the options for you through tax planning and preparation and formation support.
Frequently asked questions
Can a non-US citizen own an S-corp?
No. S-corp shareholders must be US citizens or US residents, so non-resident aliens cannot own S-corp stock directly.
Is an LLC better than a C-corp?
It depends. LLCs are simpler and avoid double taxation, while C-corps suit companies planning to raise venture capital or issue employee stock options.
What is the federal tax rate for a C-corp?
C-corporations pay a flat 21% federal corporate income tax, and shareholders are taxed again on dividends.
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