LLC vs S-Corp vs C-Corp
Tax Comparison

How Entity Structure Affects Your 2026 Tax Bill

Choosing the right business entity — LLC, S-Corporation, or C-Corporation — is the single highest-impact tax decision most business owners make. The difference can be $5,000 to $20,000+ per year in unnecessary taxes, depending on your income level and state.

Under the One Big Beautiful Bill Act (OBBBA), passed in 2026, the Section 199A Qualified Business Income deduction is now permanent for pass-through entities (LLCs and S-Corps) — and the rate was raised to 23%. This means 23% of qualified business income is deductible from taxable income — a significant benefit that was previously set to expire at 20%. The 2026 Social Security wage base is $184,500.

For most small businesses earning $80,000–$400,000 in net profit, the S-Corporation is the optimal structure. It avoids SE tax on distributions while preserving the QBI deduction. Below $50K–$80K, the added compliance costs make it a wash. Above $400K+, C-Corp with retained earnings may make sense for specific growth strategies.

Frequently Asked Questions

• How does an LLC/Sole Prop get taxed? +

  A single-member LLC (or sole proprietorship) is a "disregarded entity" for tax purposes — all profit flows to your personal return on Schedule C. You pay self-employment tax (15.3%) on 92.35% of net income, plus federal and state income tax. The upside: simplest structure, lowest compliance cost, full QBI deduction. The downside: you pay SE tax on every dollar of profit. Source: IRS Publication 334.

• How does an S-Corp reduce taxes? +

  An S-Corp pays the owner a W-2 salary (subject to FICA/payroll taxes), then distributes remaining profit as K-1 income — which is NOT subject to self-employment tax. For example, on $150K net income with a $70K salary: you pay FICA on $70K (~$10,710) instead of SE tax on $150K (~$21,194). That's ~$10,484 in annual savings, minus ~$2,600 in added compliance costs. Net savings: ~$7,884/year. Source: IRC §§ 1361-1379.

• What is double taxation with a C-Corp? +

  C-Corp profits are taxed at the corporate level (21% flat rate), then taxed again when distributed to shareholders as dividends (0%, 15%, or 20% depending on income). This "double taxation" makes C-Corps less efficient for distributing all profit to owners. However, C-Corps excel when retaining earnings for growth, raising VC capital, or providing extensive employee benefits. Source: IRC § 11, IRC § 1(h)(11).

• What is the QBI deduction and who gets it? +

  The Section 199A Qualified Business Income deduction allows pass-through business owners (sole proprietors, LLC members, S-Corp shareholders, partners) to deduct up to 23% of qualified business income. Made permanent by OBBBA in 2026, which also raised the rate from 20% to 23%. Phase-outs for specified service businesses (lawyers, doctors, consultants) begin at $197,300 (single) / $394,600 (MFJ). C-Corp owners do NOT get QBI. Source: IRC § 199A, OBBBA.

• What is a "reasonable salary" for S-Corp? +

  The IRS requires S-Corp owner-employees to pay themselves a salary that is "reasonable compensation" for the services they perform. Factors include: industry pay norms, experience, time devoted, duties, and comparable W-2 pay. A common guideline is 40–60% of net business income. Setting it too low triggers audit risk — the IRS has won multiple court cases reclassifying distributions as wages (David E. Watson v. Commissioner). Source: IRS FS-2008-25.

• When should I NOT elect S-Corp? +

  Don't elect S-Corp if: (1) Net profit is below $50K–$80K — compliance costs eat the savings. (2) You plan to raise VC or institutional capital — they prefer C-Corp. (3) You have significant losses to pass through — S-Corp loss deduction rules are stricter. (4) You have more than 100 shareholders or non-U.S. shareholders — S-Corp eligibility limits. (5) You want multiple classes of stock. In these cases, stay LLC or consider C-Corp.