Choosing between an LLC, an S corporation and a C corporation is partly a legal decision and partly a tax decision. The legal form (LLC or corporation) comes from state law. The tax treatment comes from the IRS, and an LLC can be taxed as a sole proprietorship, partnership, S corporation or C corporation. This guide compares the options on the points owners ask about most and ends with how to decide with a CPA and an attorney.
Comparison at a glance
The table assumes federal rules for tax years 2025 and 2026 and an LLC with default tax treatment (disregarded or partnership).
| Factor | LLC (default) | S corporation | C corporation |
|---|---|---|---|
| Liability protection | Generally limited under state law | Generally limited under state law | Generally limited under state law |
| Federal income tax | Passes through to owners at individual rates | Passes through to owners at individual rates | 21% at the corporation, then dividends taxed to shareholders |
| Self-employment tax | Generally on active owners' net earnings | On wages only; K-1 profit is not subject to it | On wages only; dividends are not |
| Payroll for owners | None for members; draws or guaranteed payments | Required for working owners | Required for working owners |
| Compliance and cost | Lowest for one member; Form 1065 and K-1s for several | Payroll, Form 1120-S, K-1s, basis tracking | Highest: Form 1120, estimated tax, formalities |
| QBI deduction | Eligible | Eligible; owner wages do not count | Not eligible |
| QSBS exclusion | No, unless taxed as a C corporation | No | Possible if all tests are met |
| Owner benefits | Owner generally not an employee; health premiums deductible if rules are met | Health premiums for owners above 2% are reported as wages (no FICA), then may be deductible | Owner-employees generally treated like other employees |
| Selling the business | Usually one layer of tax | Usually one layer; built-in gains tax can apply to converted C corporations | Asset sales can mean two layers; stock sales may qualify for QSBS |
What the rows mean
Liability. Limited liability comes from state law, not from the tax election, and it is not absolute. You can still be liable for your own acts, for debts you personally guarantee, and for unpaid payroll taxes if you are a responsible person. Keeping business money separate from personal money matters. Ask an attorney how your structure protects you.
Self-employment tax. An LLC member or sole proprietor generally pays self-employment tax of 15.3% on net earnings: 12.4% for Social Security up to the wage base ($184,500 for 2026) plus 2.9% for Medicare. S and C corporation owners pay payroll tax only on wages, which must be reasonable. See reasonable compensation and self-employment tax.
QBI deduction. Owners of pass-through businesses may deduct up to 20% of qualified business income, subject to limits that apply at higher incomes. The deduction was scheduled to end after 2025, and the One Big Beautiful Bill Act continued it. C corporations cannot use it. See the QBI deduction.
QSBS. Only stock of a domestic C corporation can qualify. For stock issued after July 4, 2025, up to 100% of gain can be excluded after five years, up to a cap. See QSBS.
Example: self-employment tax versus an S election
Example (tax year 2026, hypothetical): A consultant's business earns $150,000 before any owner pay. As a sole proprietor or default LLC, self-employment tax is about $21,200 (15.3% of 92.35% of profit). As an S corporation paying $80,000 of reasonable wages, total payroll tax is $12,240, which is a difference of about $8,950. Against that, Illinois replacement tax of 1.5% applies to the S corporation's net income (roughly $960 here), payroll and extra tax return costs apply, and the QBI deduction changes. The saving is smaller than the headline number, and it can disappear if wages must be higher.
Ownership, investors and Illinois
- S corporation limits. No more than 100 shareholders, no partnerships or corporations as owners, no nonresident aliens and one class of stock. Owners with foreign relatives or investors should check first. See Indian business ownership forms.
- Investors. Venture investors usually expect a C corporation that can issue preferred stock.
- Reporting. FinCEN's beneficial ownership reporting rule no longer applies to U.S. companies. See beneficial ownership information reporting.
- Illinois. Partnerships and S corporations pay 1.5% replacement tax on net income, and C corporations pay 7% income tax plus 2.5% replacement tax. Pass-through entities can elect the 4.95% PTE tax. Illinois also adds back QSBS gain excluded federally for tax years ending on or after December 31, 2026.
How to decide with a CPA and an attorney
- Write down your goals: income needs, growth, investors, and whether you plan to sell or hold.
- Project profit for the next three years, including what owners would take as pay.
- List the owners and where they live, since this can rule out an S election.
- Compare total tax for each structure, including Illinois taxes and added costs, not just self-employment tax.
- Consider benefits, retirement plans and exit plans.
- Have an attorney prepare the operating or shareholder agreement and confirm liability protection and any securities rules.
- Revisit the choice when profit, owners or plans change. Some changes, such as moving from a C to an S corporation, carry built-in gains rules.
How we can help
We can model each structure with your numbers, prepare the elections and set up bookkeeping and payroll. Our business formation and entity selection service works alongside your attorney. See also tax planning.
Frequently asked questions
Should I choose an LLC or an S corporation?
It is not either-or. An LLC is the legal form and can elect S corporation tax treatment. The question is whether the S election saves enough to justify payroll and compliance costs.
How much profit do I need before an S election makes sense?
There is no fixed number. Compare the payroll tax savings on profit above reasonable wages with added costs, Illinois replacement tax and QBI effects.
Can I start as an LLC and change later?
Yes. Changes can have tax consequences, so plan the timing. Starting as a C corporation matters for QSBS because the holding period starts when the stock is issued.
Did the 2025 tax law change this choice?
It extended the QBI deduction, which keeps pass-through treatment attractive, and it expanded QSBS for stock issued after July 4, 2025, which helps some C corporations.
Official sources
- IRS: Limited liability company (LLC)
- IRS: S corporations
- IRS: Forming a corporation (C corporations)
- IRS: Qualified business income deduction
- Illinois Department of Revenue: Income tax rates
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.