LLC, S Corporation, or C Corporation? Choosing Your Business Structure
Updated September 17, 2026.
If you're choosing between an LLC and an S corporation, you may be able to use both. An LLC is a legal structure. S corporation status is a federal tax election an eligible LLC can make.
Start with who will own the business and what liability protection you need. Then compare the taxes and annual costs under each option. A lower tax rate by itself won't tell you which one costs less.
How the options compare
| Tax setup | Where the profit is taxed | What it means for the owner |
|---|---|---|
| One-owner LLC, default treatment | On the owner's return. An individual operating a business usually files Schedule C. | Business earnings generally face income tax and self-employment tax. |
| LLC with multiple owners, default treatment | On the owners' returns. The LLC generally files a partnership return. | Each owner reports their share. Self-employment tax depends on the income and the owner's role. |
| S corporation tax treatment | Generally on the owners' returns, even when profit stays in the business. | An owner who works in the business must receive reasonable wages before taking non-wage distributions. Payroll and a separate business return add costs. |
| C corporation tax treatment | The corporation generally pays federal income tax at 21%. | Dividends paid to an individual owner are also taxable to that owner. Compare both levels of tax. |
These are the usual federal rules for domestic businesses. An LLC can elect corporate tax treatment, but S corporation status has ownership and other restrictions. Those include eligible shareholders, no more than 100 shareholders, and one class of stock.
Will an S corporation save you money?
It can, when enough profit remains after paying you a reasonable salary to justify the added costs. There isn't a profit cutoff that works for every business.
For a sole proprietor, self-employment tax pays Social Security and Medicare taxes on business earnings. An S corporation pays payroll taxes on your wages. Your share of its remaining business profit generally isn't subject to self-employment tax, but it is still subject to income tax, whether or not you withdraw the money.
The salary has to reflect your actual work, including your duties, hours, experience, and what comparable businesses pay. Choosing a low salary just to create a larger distribution can lead to the IRS treating some distributions as wages.
Ask your CPA to compare the full annual cost using:
- Your expected profit and a supported salary for the work you do.
- Payroll service fees and the cost of the additional tax return.
- Your other wages, retirement contributions, health insurance, and available deductions.
- Federal, Ohio, and city taxes.
If most of the profit would need to be paid to you as wages, the savings may be too small to cover the extra work.
Include the QBI deduction in the calculation
The qualified business income deduction, or QBI deduction, can reduce an eligible owner's federal taxable income from a sole proprietorship, partnership, or S corporation. The regular calculation allows a deduction of up to 20% of qualified business income, subject to limits. The 2025 law removed its scheduled expiration.
The owner claims the deduction. Wages you receive from your S corporation don't count as QBI, and income earned through a C corporation doesn't qualify. Your total taxable income and type of business can affect the result. That is why an S corporation comparison needs to include income tax as well as payroll tax.
When a C corporation deserves a closer look
A C corporation can fit a business that plans to bring in investors or retain substantial profits for expansion. The 21% federal rate is one part of that decision. If the company later pays those profits to you as dividends, there can be another tax at the owner level.
Include your eventual sale in the comparison. Some C corporation stock qualifies for an exclusion of gain under Section 1202. Eligibility depends on the business, how and when the stock was acquired, company size, and the holding period. Many service businesses are excluded, so don't build a sale plan around this benefit without checking it first.
Check the legal and Ohio details
An Ohio LLC generally protects you from being personally responsible for its debts simply because you're an owner. That protection has limits. A personal guarantee, for example, can make you responsible for a business loan. Have an attorney review your formation documents, ownership agreement, and liability concerns.
Ohio and city taxes also belong in the comparison. Eligible partnerships and S corporations can consider Ohio's election to pay income tax at the business level. City income taxes have separate rules. For 2026, Ohio's commercial activity tax generally applies when annual Ohio taxable gross receipts exceed $6 million. Existing registered businesses below that amount may need to close their CAT accounts to stop filing.
Make the decision before filing the election
Form 2553 is generally due no later than two months and 15 days after the start of the tax year for which you want S corporation treatment. An existing business can also file during the preceding tax year. Late-election relief has conditions, including a prior intent to operate as an S corporation and reasonable cause for missing the filing deadline.
For more on comparing business structures and tax treatment, see our choice of entity page.
This article provides general information. Tax treatment and liability protection depend on your circumstances.