Almost every LLC-versus-corporation comparison you will read is confusing for the same structural reason: it answers two separate questions at once, and the answers point in different directions.
Question one is legal. What kind of entity exists under state law — who owns it, who runs it, what paperwork keeps it alive? Question two is federal and has nothing to do with the first. How does the IRS tax it?
Once you notice they are separate, the strange sentences start making sense. Yes, an LLC can be taxed as a corporation. Yes, a corporation can be taxed like a partnership. No, an “S-corp” is not a kind of company you can form. Let us take them one at a time.
First, the thing that is not different
Limited liability. Both give you it, and to roughly the same degree. If the business is sued or cannot pay a debt, your house is not on the table — unless you signed a personal guarantee, or you did something that pierces the veil, like paying your mortgage out of the business account.
People routinely believe a corporation protects them better. It does not. The protection comes from the entity being genuinely separate from you, and you break that the same way in either structure: by treating its money as your money.
How each one is taxed, by default
This is where the real difference lives.
| Who pays the tax | What gets filed | |
|---|---|---|
| LLC, one member | You do. The IRS disregards the entity and the profit lands on your personal return. | Schedule C with your Form 1040 |
| LLC, two or more members | The members do, in proportion to their share. The LLC itself pays no income tax. | Form 1065, plus a Schedule K-1 to each member |
| Corporation (C corporation) | The corporation pays 21% on its profit. Then shareholders pay again on anything distributed. | Form 1120 |
| Either one, having elected S status | The owners do, like a partnership — but wages and distributions are treated differently. | Form 1120-S, plus Schedule K-1 |
An LLC changes its classification with Form 8832. There is one important exception to that, further down.
Double taxation, with the numbers in
People say “double taxation” so often it stops meaning anything. Here is the mechanism, once, with figures.
Your C corporation earns $100,000 of profit. It pays federal corporate tax at a flat 21%, so $21,000 goes to the IRS and $79,000 remains. You then take that $79,000 out as a dividend. Dividends are not deductible by the corporation — it already paid tax on that money — and now you pay tax on receiving it, at qualified dividend rates of 0%, 15% or 20% depending on your income, plus the 3.8% net investment income tax if your income is above $200,000 single or $250,000 filing jointly.
The top combined federal rate
At the highest brackets, profit that goes through a C corporation and then out to you as a dividend is taxed at roughly 39.8% — 21% at the company, then 20% plus 3.8% on what is left. The same profit earned through an LLC is taxed once, at your personal rate.
The catch: double taxation only bites on money you take out. Profit a C corporation keeps and reinvests is taxed once, at 21%, which is lower than most owners’ personal rates. That is why capital-hungry businesses that pay no dividends can reasonably prefer a C corporation, and why a consultant who takes home everything she earns should run screaming.
Self-employment tax: the LLC’s bill
An LLC avoids the second layer of tax and picks up a different one. Profit from a business you actively run is self-employment income, and it carries self-employment tax on top of income tax.
- The rate is 15.3% — 12.4% Social Security plus 2.9% Medicare.
- The Social Security half stops at the wage base, which is $184,500 for 2026. Above that, only the 2.9% Medicare portion continues, with no ceiling at all.
- An extra 0.9% Additional Medicare Tax applies above $200,000 single or $250,000 filing jointly. Those thresholds are fixed in statute and have never been indexed.
- You compute it on 92.35% of net profit, and you deduct half of what you pay when figuring your adjusted gross income.
On $150,000 of active LLC profit, self-employment tax alone is a five-figure number. Which brings us to the election that exists almost entirely to reduce it.
The S corporation, which is not a kind of company
You cannot form an S corporation. There is no such filing at any Secretary of State. S status is a federal tax election that an eligible entity makes, and both a corporation and an LLC can make it.
Why anyone bothers: in an S corporation, the owner is an employee. You pay yourself a salary, which carries payroll tax, and you take the remaining profit as a distribution, which does not carry self-employment tax. On a profitable business, the saving is real.
What it takes to elect it
File Form 2553, signed by every shareholder, no later than two months and fifteen days after the start of the tax year you want it to apply to — 15 March for a calendar-year business — or any time in the preceding year. Miss it and there is relief under Rev. Proc. 2013-30, but you have to ask for it.
A detail that trips up a surprising number of advisers: an LLC electing S status does not need to file Form 8832 first. The instructions to Form 2553 say so directly — a timely Form 2553 accomplishes both steps, and the entity is treated as a corporation as of the election’s effective date. Filing both is a common and unnecessary belt-and-braces move.
The part the IRS actually litigates
If you pay yourself a token salary and take everything else as a distribution, the IRS will recharacterize the distributions as wages. Its position is plain: payments to a shareholder-officer are wages to the extent they are reasonable compensation for services. In Watson v. United States, a CPA paid himself $24,000 and the court accepted the government’s figure of $91,044. The election is legitimate; a $12,000 salary on $300,000 of profit is not.
S status also comes with real restrictions the LLC does not have: no more than 100 shareholders, only one class of stock, and no partnerships, corporations or non-resident alien shareholders. That last one rules it out entirely for a lot of international founders.
The QBI deduction, and why old articles are wrong about it
The Section 199A deduction lets owners of pass-through businesses — sole proprietorships, partnerships, LLCs, S corporations — deduct up to 20% of qualified business income. It was scheduled to expire after 2025. It did not: the 2025 tax act repealed the sunset, so the deduction is permanent.
- The percentage is 20%. A widely repeated 23% figure came from a version of the bill that did not become law.
- For 2026, the income thresholds are $201,750 for most filers and $403,500 filing jointly. Below those, you take the full 20% with no further tests.
- Above them, two limitations phase in over a range that the 2025 act widened to $75,000 ($150,000 joint): a W-2 wage and property test, and a restriction on specified service businesses — law, accounting, consulting, health, financial services and others.
- New for 2026: a minimum deduction of $400 for anyone with at least $1,000 of qualified business income from a business they materially participate in.
Be careful what you fact-check this against. The IRS’s own newsroom page on the QBI deduction still says the section applies to years ending on or before 31 December 2025 and does not mention the 2025 act at all. The statute and Rev. Proc. 2025-32 are current; that page is not.
The practical effect: for a profitable service business, the combination of pass-through treatment and a 20% deduction is hard for a C corporation to beat, unless the business genuinely retains its profits.
The one thing that clearly favors a C corporation
Qualified small business stock, under Section 1202. If you hold stock in a qualifying C corporation and later sell it, you may exclude the gain from federal tax entirely. The 2025 act expanded this considerably for stock issued after 4 July 2025:
- 50% of gain excluded at three years, 75% at four, 100% at five — where it used to be all or nothing at five.
- The per-issuer cap on excluded gain rose to $15 million.
- The company’s aggregate gross assets limit rose to $75 million.
It requires a C corporation. An LLC cannot issue qualified small business stock, and neither can an S corporation. If your plan is to build something and sell it, this belongs in the calculation from day one, because the clock starts when the stock is issued.
Ownership and paperwork
| LLC | Corporation | |
|---|---|---|
| Who can own it | Anyone — individuals, other companies, trusts, non-residents. No cap. | Anyone, if it stays a C corporation. S status caps it at 100 US shareholders, one class of stock. |
| How ownership splits | However the operating agreement says. Profits do not have to follow capital. | By share class and count. Cleaner for investors, less flexible for founders. |
| Governing document | Operating agreement. Not filed with the state. | Bylaws, plus board and shareholder resolutions. Not filed either. |
| Annual formalities | Whatever the operating agreement requires, which can be very little. | Meetings, minutes, resolutions. Skipping them is what a plaintiff points at. |
| To form in Florida | $125 | $70 |
The flexibility cuts both ways. An LLC can allocate profit almost any way its members agree to, which is superb for two partners with different contributions and awkward for anyone trying to price equity. A corporation’s rigidity is exactly what makes it legible to an outside investor.
How to actually decide
Will someone buy equity in this?
If institutional money is coming, form a Delaware C corporation. Everything below is for the other case.
Will you take the profit out, or leave it in?
Taking it out favors pass-through treatment. Leaving it in to fund growth is where a C corporation’s 21% starts to look attractive.
Is any owner a non-resident, a trust, or another company?
That rules out S status and usually points to an LLC.
Is the profit big enough to make payroll worth running?
The S election saves self-employment tax but costs you a payroll, a defensible salary and another return. Below roughly the wage base, the saving often does not clear the cost. Above it, it usually does.
Is the plan to build it and sell it?
Then price the Section 1202 exclusion, and note that it needs a C corporation and a five-year hold.
One caveat that applies to every figure here: this is all federal. States do not all follow along. Several do not conform to the QBI deduction, some tax S corporations as if the election never happened, and pass-through entity tax regimes vary enormously. Whatever you conclude federally, check what your state does with it.
Sources
- Corporate rate: 26 U.S.C. s. 11(b). Qualified dividend and capital gain brackets for 2026: Rev. Proc. 2025-32. Net investment income tax: 26 U.S.C. s. 1411 and the IRS NIIT page.
- LLC default classification: IRS, Limited Liability Company (LLC). Self-employment tax rate: IRS self-employment tax page; 2026 Social Security wage base of $184,500 from the SSA contribution and benefit base.
- Section 199A as amended by P.L. 119-21 (enacted 4 July 2025); 2026 thresholds and the new minimum deduction from Rev. Proc. 2025-32.
- S corporation eligibility and election: IRS, S corporations and the Instructions for Form 2553. Reasonable compensation: IRS S corporation compensation guidance; Watson v. United States, 668 F.3d 1008 (8th Cir. 2012); Rev. Rul. 74-44.
- Qualified small business stock: 26 U.S.C. s. 1202 as amended by P.L. 119-21 s. 70431. Florida formation fees: sunbiz.org. All checked 9 September 2026.