Starting your own business is an exciting leap. But before you can open your doors or launch your website, you have to make a foundational decision that will impact your taxes, your personal risk, and your ability to grow. You need to choose a legal structure.
It’s the most confusing part for many new entrepreneurs. What’s the difference between an LLC, an S-Corp, and a C-Corp? Which one is right for you?
This guide will break down the “big three” in simple terms to help you understand your options.
Disclaimer: This article is for informational purposes only and is not a substitute for legal or financial advice. Your choice of entity has significant tax implications, and you should consult with a business lawyer or a Certified Public Accountant (CPA) to make the best decision for your specific situation.
First, Why Not Just Be a “Sole Proprietorship”?
When you start working for yourself (as a freelancer, for example), you are a “sole proprietorship” by default. You and the business are one and the same.
- The Good: It’s easy. You don’t have to file any paperwork.
- The Bad (and it’s very bad): You have unlimited personal liability. If your business is sued or accumulates debt, your personal assets—your house, your car, your personal bank account—are all at risk.1
The primary reason to form a legal business entity is to create a “corporate veil,” a legal wall between your business and your personal life. This is where the LLC, C-Corp, and S-Corp come in.
The LLC: The Popular Choice for Flexibility and Protection
The Limited Liability Company (LLC) is the most popular business structure for new entrepreneurs, and for good reason.
What is it?
An LLC is a legal entity, separate from its owners (who are called “members”).2 It’s formed by filing “Articles of Organization” with your state.
The Key Benefits:
- Limited Liability: This is its namesake and biggest perk. It provides that “corporate veil.” If your business is sued, your personal assets are generally protected.3
- Pass-Through Taxation: By default, an LLC is a “pass-through” entity.4 This means the business itself doesn’t pay any corporate income taxes. Instead, the profits and losses “pass through” to the owners’ personal tax returns, and you pay income tax and self-employment tax just once. This avoids the “double taxation” of a C-Corp.
- Simplicity: LLCs are generally easier to manage and have less formal compliance requirements than corporations.5
Who is it for?
The LLC is perfect for small business owners, service-based businesses (consultants, designers), freelancers who want protection, and real estate investors.
The C-Corp: The Traditional Choice for Raising Capital
The C-Corporation (C-Corp) is the old-school, traditional corporate structure. When you think of a “corporation” that is “publicly traded,” you are thinking of a C-Corp.
What is it?
A C-Corp is a completely separate legal and tax entity from its owners (who are called “shareholders”).6 It’s formed by filing “Articles of Incorporation” with the state.
The Key Benefits:
- Ability to Raise Capital: This is the C-Corp’s superpower.7 It is the only structure that allows you to sell stock to raise money. Venture capitalists (VCs) and angel investors will only invest in C-Corps because they can easily buy equity (stock) in the company.8
- No Ownership Limit: A C-Corp can have unlimited shareholders, and those shareholders can be anyone, including other companies or foreign citizens.9
The Main Drawback:
- Double Taxation: This is the C-Corp’s well-known downside.10 1) The corporation pays taxes on its profits. 2) When it distributes those profits to shareholders as dividends, the shareholders must pay personal income tax on them again.11
Who is it for?
Startups that plan to seek venture capital, businesses that want to “go public” (IPO) one day, or large enterprises with many owners.12
The S-Corp: The Tax-Saving Hybrid
This is the most confusing one, so let’s be clear: An S-Corp is not a legal structure. It is a tax election you make after forming your business.
What is it?
You first form an LLC or a C-Corp. Then, you file Form 2553 with the IRS to elect to be taxed as an S-Corporation (S-Corp).13
The Key Benefit:
- Saving on Self-Employment Taxes: This is the one and only reason to become an S-Corp.
- In a standard LLC, the owner pays self-employment tax (Social Security & Medicare, ~15.3%) on all profits the business makes.14
- In an S-Corp, you must pay yourself a “reasonable salary” (a fair wage for your job), and you pay self-employment taxes only on that salary.15
- All remaining profits can be taken as a “distribution,” which is not subject to self-employment tax.
This tax savings can be thousands of dollars per year for a profitable business.16
The Drawbacks:
- More Paperwork: You must run formal payroll, file additional tax forms, and follow stricter IRS rules.
- Strict Restrictions: You must have fewer than 100 shareholders, and all must be U.S. citizens or residents.
Who is it for?
Established, profitable LLC owners or single-owner businesses who are paying too much in self-employment tax and want to take home more of their money.
Comparison at a Glance
| Feature | LLC (Default) | C-Corporation | S-Corporation |
| Liability | Limited | Limited | Limited |
| Taxation | Pass-Through | Double Taxation | Pass-Through |
| How it’s Taxed | Profits pass to personal return. | Corp pays taxes, then shareholders pay taxes on dividends. | Owner pays self-employment tax on “reasonable salary” only. |
| Best For | Simplicity, flexibility, and basic protection. | Raising money from VCs and angel investors. | Saving money on self-employment taxes. |
Conclusion: Which One is Right for You?
The choice is foundational for your business.
- Choose an LLC if you are a new business, freelancer, or service provider and your main goal is liability protection and simplicity.
- Choose a C-Corp if your primary goal is to seek investment from VCs and grow into a large company.
- Choose an S-Corp (as a tax election) if your business is already established and profitable, and your main goal is to reduce your self-employment tax bill.
Your first step is almost always forming an LLC. It provides the protection you need from day one. Then, as your business grows in profitability, you can speak with your CPA about electing S-Corp status to save on taxes.