LLC vs S-Corp vs C-Corp: The Plain-Math Comparison

By MercConsulting · Published 2026-07-18

See the actual math on self-employment tax vs. payroll tax at three profit levels, so you know exactly when an S-corp election truly pays off.

An LLC is the flexible legal wrapper almost every new business should start with. An S-corp is not a separate legal entity — it's a tax election an LLC or corporation can file with the IRS once profit justifies the extra payroll and paperwork. A C-corp only makes sense when you're raising outside capital, issuing stock options, or reinvesting profit rather than paying it out. Most owner-operators never need anything beyond an LLC with a well-timed S-corp election layered on top.

The internet treats "LLC," "S-corp," and "C-corp" as three parallel boxes, when really two questions stack on top of each other: what legal entity protects you, and how does the IRS tax its profit. Tangle those two and you'll either overpay self-employment tax for years, or elect S-corp status too early and hand the savings to a payroll company.

Below is the plain math at a few profit levels, so you can see roughly where the S-corp election starts to pay for itself. The numbers are illustrative and rounded — your CPA needs to run your real figures before you file anything.

"I kept hearing I was 'leaving money on the table' by not being an S-corp. Nobody mentioned I'd also be running payroll for myself twice a month and filing a whole separate tax return. It wasn't a bad move — it just wasn't the free lunch it sounded like."

The Short Answer: Which Structure Fits Which Owner

If you're a solo owner or small partnership with net profit under roughly $40,000, stay with a default LLC and revisit annually as profit grows. If profit consistently lands in the $60,000–$100,000+ range, an S-corp election is worth modeling seriously. If you're raising venture or institutional capital, or planning broad employee equity, a C-corp is usually the structure investors require — a decision made for you by the capital source, not the tax code.

Everything else here is the reasoning behind those three sentences. For the mechanics of standing up the entity itself, see our walkthrough on forming an LLC in Texas.

The Key Misconception: S-Corp Is a Tax Election, Not an Entity

There is no such thing as forming an "S-corp" at the state level. You form an LLC or a corporation with your Secretary of State, and separately, ask the IRS to tax that entity under Subchapter S by filing Form 2553. Nothing about your liability protection or day-to-day legal structure changes — only how the IRS calculates your tax bill.

So the real question isn't "LLC or S-corp" — it's "LLC, taxed as a sole proprietorship or partnership, or LLC, taxed as an S-corp." Both are still LLCs with the same liability shield. The election is a switch on the tax side, and — the part people miss — one you can flip back off if your situation changes.

How Each Option Is Taxed, in Plain English

Default LLC: Profit passes straight through to your personal return. If you're actively working in the business, the entire net profit is subject to self-employment tax — 15.3% covering Social Security and Medicare — on top of ordinary income tax. No salary, no payroll, no W-2; you just pay yourself from the business account.

LLC or corporation with an S-corp election: You become an employee of your own business, running payroll and paying yourself a "reasonable salary" subject to standard payroll taxes. What's left after salary and expenses goes to you as a distribution — and distributions are not subject to self-employment or payroll tax at all. That gap is the entire source of S-corp tax savings.

C-corp: The corporation pays a flat federal corporate income tax rate (21%) on its profit. If it distributes any after-tax profit as a dividend, the shareholder pays tax again at their personal rate — the "double taxation" you'll hear about. Profit kept inside the corporation to reinvest is taxed only once, which is why C-corps suit businesses plowing earnings back into growth rather than distributing them.

The Math at Three Profit Levels: Where the S-Corp Break-Even Sits

These numbers are rounded and assume a single owner-operator with no other complicating factors — a sketch of the decision's shape, not a substitute for your CPA's actual numbers.

Net profit: $40,000. As a default LLC, self-employment tax runs roughly $5,600. An S-corp election with a $30,000 salary generates payroll tax of roughly $4,600, leaving $10,000 as a distribution — a paper savings of about $1,000. But payroll and a separate business return typically run $1,500–$2,500 a year, so the election usually costs more than it saves here.

Net profit: $80,000. Self-employment tax as a default LLC runs roughly $11,300. With a $50,000 salary under an S-corp election, payroll tax runs about $7,650, and $30,000 flows through untouched — a gross savings of roughly $3,600. Net of $2,000–$3,000 in admin cost, the savings is modest but real.

Net profit: $150,000. Self-employment tax as a default LLC runs roughly $21,000. With a $70,000 salary, payroll tax runs about $10,700, leaving $80,000 as a distribution — a gross savings near $10,000. Even after admin costs, the net savings is substantial and recurs every year the profit level holds.

The general shape: the election gets more valuable as profit climbs above a reasonable salary, since a bigger slice escapes payroll tax as distribution. Below roughly $50,000–$60,000 in consistent net profit, the fixed cost of running payroll usually eats the benefit.

What the S-Corp Election Costs You in Payroll and Admin

The tax savings above are only half the picture. An S-corp election adds real, recurring obligations:

• Actual payroll — a payroll service, regular pay periods, and withholding deposits, even for a one-person business.
• A separate business tax return (Form 1120-S) alongside your personal return, usually a higher tax-prep bill.
• Cleaner bookkeeping — salary and distributions must be tracked distinctly, not commingled like a default LLC's owner draws.
• State payroll registration and unemployment insurance, which varies by state.
• Audit exposure on the reasonable-salary question if it's set suspiciously low relative to distributions.

None of these are dealbreakers once profit supports them — just net them against the tax savings before filing Form 2553, not after.

When a C-Corp Actually Makes Sense (and When It Doesn't)

For most small operators, a C-corp is the wrong structure — double taxation on distributed profit makes it a worse deal than an LLC or S-corp-elected LLC. But there are cases where it's genuinely right:

• Raising venture or institutional capital. Most institutional investors require a C-corp because of how preferred stock and cap tables work — a term the money requires, not a tax decision.
• Reinvesting most profit rather than distributing it. If earnings plow back into growth for years instead of paying owners, the double-taxation problem barely shows up.
• Employee stock options at scale. Standard equity compensation mechanics are the C-corp toolkit; S-corps face shareholder restrictions that make broad equity plans awkward.

Outside those cases, a C-corp is usually the most expensive structure on the shelf, not the most sophisticated.

How to Change Your Mind Later Without Starting Over

Because the S-corp is a tax election layered on an existing entity, you generally don't need to dissolve anything to change course as profit grows.

Owners at this stage often start asking about structures for multiple properties or ventures — see our explainer on holding companies and series LLCs, or this piece on what an LLC actually protects if the liability side is still unclear.

Questions to Bring to Your CPA Before Electing

Before filing anything, walk through these with your CPA, not a generic online calculator:

• What's a defensible "reasonable salary" for my role, in my industry, in my market?
• What does your firm charge for the added 1120-S return and payroll administration?
• Does my state layer on its own franchise or payroll tax that changes the numbers above?
• Am I profitable enough, consistently enough, to justify the fixed admin cost?
• If I have partners, how do we handle unequal salaries or distribution splits under an S-corp?

An entity and tax-election review is exactly the kind of decision we walk owners through as part of a formation engagement. See how that fits with the rest of what we do on our services page, or look at how similar decisions played out in our portfolio of client work.

Frequently Asked Questions

At what income level does an S-corp make sense?

Most owners see a real net benefit once consistent annual net profit clears $50,000–$60,000, since that's roughly where self-employment tax saved on distributions starts exceeding the added payroll and tax-prep costs. Your actual break-even depends on your state, your industry's salary benchmark, and what your CPA and payroll provider charge.

Can an LLC be taxed as an S-corp?

Yes — this is the standard path for most small businesses that elect S-corp treatment. The LLC remains an LLC at the state level, with the same liability protection, but files Form 2553 with the IRS to be taxed under Subchapter S instead of as a default sole proprietorship or partnership.

What is the downside of an S-corp election?

The main downsides are administrative: running actual payroll even as a one-person business, filing a separate business return, and paying a defensible reasonable salary. If profit is too low, those added costs can exceed the self-employment tax you save.

Why would a small business choose a C-corp?

Typically because it's raising venture or institutional capital, which usually requires C-corp structure and stock; plans to reinvest most profit rather than distribute it; or wants broad employee equity compensation. Outside those scenarios, double taxation usually makes a C-corp the more expensive choice.

Can I switch from an LLC to an S-corp later?

Yes. Because the S-corp is a tax election rather than a separate entity, an existing LLC can file Form 2553 to add S-corp treatment once profit justifies it — no need to dissolve the LLC or form a new company. The election can also be revoked later if circumstances change.

This article is for educational purposes only and is not legal, tax, or investment advice. Consult qualified professionals about your specific situation.