LLC vs. S-Corp vs. C-Corp (which one do I want?)
Quick decision tree, then the details below.
Will you take outside investment from VCs or angel investors?
├─ Yes → Delaware C-Corp (FormationHub doesn't form these — see lawyer)
└─ No
│
├─ Will the business net more than $40,000/year?
│ ├─ Yes → LLC + elect S-Corp taxation (save on self-employment tax)
│ └─ No → LLC, default pass-through taxation
│
└─ Are you the only owner?
├─ Yes → Single-member LLC (simplest)
└─ No → Multi-member LLC with clear Operating Agreement
The honest 60-second version
LLC is a business structure (a legal entity). S-Corp and C-Corp are tax classifications.
You form an LLC, then choose how it's taxed: - Default: pass-through to your personal return (like a sole proprietorship for solo, partnership for multi). - Elective: file Form 2553 to be taxed as an S-Corp (avoids 15.3% self-employment tax on profits above a "reasonable salary"). - Elective: file Form 8832 + Form 2553 to be taxed as a C-Corp (rare for small businesses — double taxation; only useful if you're seeking VC).
You can change your tax classification later (mostly — there are some restrictions on switching back).
When does S-Corp election save real money?
S-Corp election lets you split your earnings into: 1. Salary — taxed normally (15.3% self-employment tax + income tax). 2. Distributions — taxed at income tax only (no self-employment tax).
The savings: ~15.3% × (your profit – reasonable salary).
Example: - Your LLC nets $100,000/year. - Reasonable salary for your role: $60,000. - Distribution: $40,000. - Self-employment tax saved: 15.3% × $40,000 = $6,120/year.
But S-Corp election has costs: - Payroll service (Gusto, ADP, etc.): ~$30-60/month = $360-720/year. - More complex tax return (Form 1120-S): your CPA charges ~$500-1500 more. - Required to run payroll on yourself — no more just-paying-yourself-from-the-bank.
Rule of thumb: S-Corp election saves real money when net profits exceed ~$40-50k/year. Below that, the costs eat most of the savings.
When do you want a C-Corp instead?
C-Corp is the right choice if: 1. You're raising venture capital. VCs almost universally require Delaware C-Corp. 2. You're issuing stock to employees as compensation. 3. You're planning to sell the business via IPO.
C-Corp downsides for small businesses: - Double taxation: corporate income taxed at 21% + dividends taxed at personal income rate. - More complex accounting and tax returns. - More regulatory oversight (Sarbanes-Oxley if public).
For 99% of solo founders and small businesses, an LLC is the right choice.
When can you NOT use an LLC?
Professional services in some states: doctors, lawyers, CPAs may need to form a Professional LLC (PLLC) or Professional Corporation (PC). FormationHub handles PLLCs in most states; check with us.
Banks and insurance companies: regulated industries usually require a corporation, not an LLC.
Non-profit / 501(c)(3): must be a nonprofit corporation, not an LLC.
How FormationHub handles S-Corp election
We don't auto-elect S-Corp during LLC formation — that's a separate decision once you have the LLC + EIN.
Once you're ready, our S-Corp election add-on ($99) handles Form 2553 with the IRS. The election must be made within 75 days of LLC formation OR by March 15 of the tax year you want it to apply to — we send reminders before that window closes.
Next steps
Ready to form an LLC? https://www.formationhub.com/
Already have an LLC and want to elect S-Corp? Open a chat — we'll check eligibility and quote the timeline.
Not sure if S-Corp is right for you? Open a chat with your expected first-year profit and we'll do the math.