Entity Selection Stack

Decision Framework

How to Choose Your Entity in 6 Steps

Follow this stack in order. Each step narrows the decision before you move to the next.

Calculate net profit

Start with your Schedule C or LLC net income — this single number drives the entire entity math.

Compare SE tax cost

LLC: all profit subject to SE tax. S-Corp: only salary subject to SE tax. Run both at your profit level.

Factor QBI deduction

Both LLC and S-Corp get 20% QBI on distributions. Check phase-out thresholds if taxable income exceeds $206K.

Check your state taxes

CA, NY, TX add significant costs. Look up your state's entity-level tax and whether PTET is available.

Assess audit risk

S-Corp with 90% distributions / 10% salary is a red flag. Maintain defensible documentation.

Run 5-year projection

Account for compliance costs, QBI, state taxes, and exit scenarios. The full projection requires your actual numbers.

Run the 5-Year Entity Projection — $19 →

Income Decision Table

Which Entity Wins at Each Profit Level?

Based on single filer, no state income tax, $0 payroll service cost, no employees. See disclaimers below.

Key assumptions: Single filer, no state income tax, $0 payroll service cost, no employees, no QBI phase-out triggered. Actual results vary significantly based on your state, filing status, payroll costs, and salary defensibility. Use the $19 Entity Report for your actual numbers.

Annual Net Profit	LLC SE Tax	S-Corp SE Tax (50/50 split)	S-Corp Savings	Recommended Entity	Notes
Under $40K	$4,700–$6,120	$3,060–$3,060	Minimal / negative	LLC (or Sole Prop)	Compliance cost outweighs savings. Keep simple.
$40K–$75K	$6,120–$10,455	$3,060–$5,745	$1,500–$5,400	Toss-up — model yours	Break-even zone. Compliance cost ($300–$800/yr) eats most of the savings. Run your numbers.
$75K–$100K	$10,455–$13,230	$5,745–$7,650	$5,000–$6,000	S-Corp wins	Substantial savings. Annual compliance well worth it.
$100K–$150K	$13,230–$19,845	$7,650–$11,475	$7,000–$10,000	S-Corp clearly wins	Strong case. QBI deduction also applies. Payroll setup pays for itself many times over.
$150K–$250K	$19,845–$29,865	$11,475–$19,125	$10,000–$16,000	S-Corp clearly wins	Maximum pass-through benefit zone. Review QBI phase-out if taxable income exceeds $206K.
$250K–$400K	$29,865–$38,250	$19,125–$24,300	$10,000–$14,000	S-Corp OR C-Corp — model both	C-Corp may save more if profits reinvested long-term. Compare 21% Corp vs 37% personal rates.
Over $400K	$38,250+	$24,300+	$14,000+	C-Corp or S-Corp — depends on plans	At this income, a full analysis is essential. C-Corp with reinvestment, QBI 80% DRD, QSBS eligibility all matter.

SE Tax Mechanics

Self-Employment Tax: The Core Trade-off

Everything in entity selection flows from the SE tax differential between pass-through entities and S-Corp.

The LLC problem: A single-member LLC is a disregarded entity — all net profit flows to your Schedule C and is subject to SE tax (12.4% Social Security + 2.9% Medicare = 15.3% on net earnings up to $176,550, plus 2.9% on all earnings above that). There's no way to avoid SE tax on LLC profits.

Component	Rate	2026 Wage Base	Max Tax
Social Security (Employer + Employee)	12.4%	$176,550	$21,892
Medicare (Employer + Employee)	2.9%	No cap	Unlimited
Additional Medicare Tax	0.9%	$200K (single)	Unlimited above threshold
Total SE Tax (LLC/disregarded)			15.3% + 0.9% over $200K
S-Corp savings: distributions are NOT subject to SE tax			Save 15.3% on distributions

2026 Social Security wage base: $176,550 (up from $168,600 in 2025). Once your salary hits this threshold, Social Security tax stops — but Medicare tax continues on all earnings. The S-Corp savings above the wage base are still real: every dollar of distribution above $176,550 avoids the Medicare portion of SE tax.

Tax Deduction

QBI Deduction: The 20% Pass-Through Bonus

Section 199A gives pass-through entities a 20% deduction on qualified business income. Here's how it works and where the traps are.

1 Basic QBI calculation: 20% of your pass-through business income is deductible from your taxable income (not from SE tax — from income tax). For a single filer with $100K net profit, QBI = $20K deduction = ~$4,700 tax savings at 23.6% bracket.
2 W-2 wage limitation (phase-in): If taxable income exceeds $206,100 (single) or $413,200 (MFJ), the deduction may be limited by W-2 wages paid or qualified property. S-Corp salary counts as W-2 wages for this purpose — another reason the salary isn't just a cost, it's also a QBI builder.
3 SSTB phase-out: Specified Service Trade or Business activities (health, law, accounting, consulting, brokerage, financial services, athletes) have QBI phase-out starting at $206,100 single. Between $206,100 and $257,100 (single), QBI is phased out. Above $257,100, no QBI for SSTB owners.
4 C-Corp DPAD: C-Corps get an 80% Domestic Production Activities Deduction (DPAD) instead of QBI. At 21% corporate rate with 80% DPAD, effective rate on qualifying production income is 4.2% — a significant advantage for reinvestment scenarios.

→ QBI Deduction Calculator → Entity Comparison Tool

State Tax Analysis

SALT Cap and State Entity Taxes

The $10,000 SALT cap (established by the TCJA in 2017) primarily affects high-tax states. Here is the state landscape and the PTET workaround.

The SALT cap at a glance: If you itemize deductions, state and local taxes (SALT) are capped at $10,000 — this affects your personal return but does not affect what you pay at the entity level. For LLC/S-Corp owners in high-tax states, state income tax on pass-through income gets caught in the cap. 36 states have created a PTET (Pass-Through Entity Tax) workaround that lets business owners pay state tax at the entity level and claim a credit — effectively bypassing the $10K cap.

California

$800 min franchise tax + 1.5% net income on LLCs. S-Corp: 1.5% on net income.

PTET available — 9.3% (with credit)

New York

4% surcharge on S-Corp E&P above $250K. 6.85% top personal rate.

PTET available — 10.9% max rate

Texas

No income tax. 0.375% margin tax on gross receipts minus COGS.

No income tax — no SALT cap issue

Florida

No state income tax. 5.5% corporate income tax for C-Corps.

No income tax — no SALT cap issue

Illinois

4.95% flat income tax. 9.5% flat PTET rate.

PTET: 9.5% flat (eliminates SALT cap)

Washington

No state income tax. 7% B&O tax on gross revenues.

No income tax

→ Compare by State → State Relocation Guide

S-Corp Compensation

Salary vs. Distribution: The 9-Factor Test

How much of your S-Corp profit should be salary vs. distribution? The IRS tests this with a 9-factor analysis — here is how it works.

The risk: S-Corp distributions are not subject to SE tax. Every dollar shifted from salary to distribution saves 15.3%. The IRS knows this and audits S-Corps where distributions dwarf salary — especially for high-income filers. The Watson v. Commissioner case (T.C. Memo 2007-115) established the framework.

1 Training and experience: What is the reasonable compensation for your role and industry? Use BLS data, industry salary surveys, and comparable positions to establish a defensible range.
2 Time and effort: How many hours do you work? Document time. Part-time operators face more scrutiny.
3 Contribution to the business: What is your role in generating revenue? Are you the primary revenue driver or are you delegating?
4 Historical payments: What did you pay yourself historically? The IRS looks at consistency.
5 Management duties: Are you running the business or are you delegating operations to employees?
6 Nature of services: What services do you render? This applies especially to professional services.
7 Complexity of responsibilities: How complex are your duties? More responsibility = higher reasonable salary.
8 Voluntary deferrals: Did you forgo salary to maximize distributions? The IRS flags this.
9 Comparable businesses: What do similar businesses pay in comparable markets?

Defensible ratio guide: 40-60% salary / 40-60% distribution is the most common defensible range for profitable S-Corps where the owner provides substantial services. A 90/10 split is a high-risk profile that the IRS statistical DIF scoring flags. Document everything: maintain time logs, salary surveys, job descriptions, and annual compensation reviews.

→ Reasonable Salary Calculator → SE Tax Calculator

Audit Risk

IRS Enforcement: Who Gets Audited and Why

S-Corp returns face elevated scrutiny. Here's what the IRS is looking for and how to stay off their radar.

Entity / Profile	Est. Audit Rate 2024	Primary Triggers
Sole Prop / Schedule C (average)	0.46%	High loss claims, home office, hobby rules
S-Corp with low salary / high distributions	~1.2%+	90%+ distributions, no W-2, high Schedule E income
S-Corp with defensible salary / payroll	0.75%	Standard IRS scrutiny; lower if ratios are defensible
Partnership (multi-member)	0.85%	Losses, tiered structures, PTP investments
C-Corp	~1.0%	Dividends, related-party transactions

1 DIF scoring: The IRS Discriminant Index Function (DIF) model scores returns on audit potential. S-Corp returns with ratios of distributions-to-salary exceeding the industry norm are flagged. The IRS has also started matching K-1 data to W-2 and 1099 data at scale.
2 2,500+ trained pass-through agents: The IRS LB&I division has deployed over 2,500 agents specifically trained in pass-through entity examination. These agents are not just looking at S-Corp officer compensation — they are examining QBI deduction compliance and partnership basis issues.
3 Document matching: The IRS matches 1099s, K-1s, and W-2s against filed returns. If your business reports income but your personal return shows a low salary, expect a letter at minimum — an audit at worst.

See your full entity risk profile

The $19 Entity Report analyzes your income level, salary ratio, and state to give you a defensible entity structure recommendation.

$19 Entity Report →

S-Corp Election

Form 2553: How to Elect S-Corp Status

The rules, deadlines, and what to do if you miss the deadline.

Standard election: File Form 2553 by March 15 (for calendar-year entities) to elect S-Corp status for the tax year. The form must be signed by all shareholders who owned stock during the tax year.

✓ Eligibility check: S-Corp requires ≤ 100 shareholders, all of whom must be US citizens/residents, single class of stock, and no non-permitted entity owners (no partnerships, C-Corps, foreign entities as shareholders).
✓ Late election relief: If you missed the March 15 deadline, Rev. Proc. 2013-30 allows late S-Corp election relief if filed within 3 years and the entity had reasonable cause. The IRS reviews each request — document the reason thoroughly.
✓ Retroactive elections: Generally not allowed — you cannot elect S-Corp status for a prior year if you didn't file on time and don't qualify for late relief. Plan ahead.
✓ State-level elections: Some states don't recognize S-Corp elections (California and New York do, but with additional taxes). Confirm your state's treatment before electing.

→ Late Election Relief Guide → S-Corp Election 2026 Guide

Not sure which entity is right for you?

Get a personalized 5-year projection with your actual income, state, and filing status — plus a recommended entity structure and the exact salary to distribution ratio to defend.

$19 — Get Your Report →

C-Corp Analysis

When C-Corp Makes Sense

Double taxation is real, but C-Corp has advantages that can outweigh it in specific scenarios.

C-Corp risk: C-Corps pay 21% corporate tax on profits, then shareholders pay capital gains tax on distributions. This double taxation can wipe out the advantage if you regularly distribute profits. C-Corp is best when profits are retained and reinvested, not extracted.

Scenario	C-Corp Advantage	Key Threshold / Detail
Reinvesting profits at scale	21% corporate rate vs 37% top personal rate	Retain > 50% of profits; 5+ year horizon
Defined benefit / pension plans	C-Corp can deduct larger DBP contributions	High-income owner with retirement goals
Qualified Small Business Stock (QSBS / Section 1202)	100% exclusion of gain on sale	Gross assets < $50M at issuance; hold 5+ years
80% DPAD on production income	4.2% effective rate on qualifying income	Manufacturing, software, qualified production
Future sale / exit planning	Long-term capital gains treatment vs ordinary income	Structure the exit from day one

→ Full C-Corp vs Pass-Through Analysis → Entity Comparison Tool

Quick Answers

Frequently Asked Questions

Click any question to expand the answer. These are the questions Google uses for featured snippets.

The entity selection stack is the decision hierarchy between Sole Proprietorship (Schedule C), LLC taxed as disregarded entity, LLC taxed as S-Corp, and C-Corp. The choice is driven primarily by annual profit level, state of residence, audit risk tolerance, and whether you have employees or partners. At low profits (< $40K), sole prop or single-member LLC typically wins. Between $40K–$75K, the math tightens. Above $75K, S-Corp becomes compelling. Above $250K with reinvestment, C-Corp warrants analysis.

The break-even for S-Corp election is typically $75,000–$80,000 in annual net profit for a single filer. Below that, compliance costs (payroll service, state filings, Form 941/940) typically exceed the SE tax savings. Above $100K, the savings are substantial — $5,000–$15,000/year depending on profit level, filing status, and whether you can take a defensible salary. The QBI deduction also applies to S-Corp distributions, which further widens the advantage.

The Qualified Business Income (QBI) deduction under Section 199A gives a 20% deduction on pass-through business income. It applies to S-Corp distributions (not salary) and LLC partnership distributions. The deduction phases out for specified service trades or businesses (SSTBs) at $206,000 (single) and $413,000 (MFJ) taxable income. C-Corps get an 80% deduction from the Domestic Production Activities Deduction (DPAD) instead of QBI.

The SALT (State and Local Tax) deduction is capped at $10,000 for itemizers ($5,000 for married filing separately). This primarily affects residents of high-tax states (CA, NY, NJ, IL). For pass-through entities, state income taxes paid at the entity level reduce taxable income but still hit the $10K cap when deducted on Schedule A. 36 states now offer a Pass-Through Entity Tax (PTET) credit as a workaround — paying state taxes at the entity level and receiving a credit that bypasses the SALT cap.

The IRS uses a 9-factor test for reasonable compensation (Watson v. Comm'r, T.C. Memo 2007-115). Common defensible ratios range from 40-60% salary / 40-60% distribution for profitable businesses. The IRS flags ratios above 80% distributions / 20% salary as high audit risk. A ratio closer to 50/50 is more defensible, backed by market-rate salary studies, time logs, and comparable data. Keep records supporting every dollar paid as salary.

C-Corp becomes attractive in three scenarios: (1) You need to retain and reinvest profits at scale — the 21% corporate rate plus eventual capital gains treatment beats repeated pass-through taxation. (2) You have a defined benefit plan (DBP/pension) — C-Corps can deduct larger contributions. (3) You're planning an exit via Qualified Small Business Stock (QSBS), which allows 100% exclusion of gains under Section 1202 for companies with < $50M in gross assets.

File Form 2553 by the 15th day of the 3rd month of the tax year (March 15 for calendar-year companies) to elect S-Corp status for that year. If you miss the deadline, Rev. Proc. 2013-30 provides late election relief — file Form 2553 with a statement explaining reasonable cause within 3 years of the intended election date. The IRS may accept it if you can show the failure was due to reasonable cause and not willful neglect.

California has the highest combined entity-level taxes: $800 minimum franchise tax plus 1.5% net income tax on LLCs. New York charges a 4% surcharge on S-Corp accumulated E&P above $250K. Texas imposes a 0.375% margin tax on gross receipts minus COGS. 36 states now offer Pass-Through Entity Tax (PTET) as a workaround to the SALT deduction cap. Tennessee and Illinois have the highest flat-rate PTET systems.