LLC, S-Corp or C-Corp: Which One Do You Actually Need?

The question comes up constantly, usually phrased as "should I be an LLC or an S-corp?" — which contains a category error worth clearing up first.

An S-corp is not an entity

An LLC and a C-corp are entities: things you file with your state. An S-corp is a tax election you make with the IRS. An LLC can elect S-corp taxation. So can a C-corp. You are not choosing between an LLC and an S-corp — you are choosing an entity, then choosing how it is taxed.

The LLC

Liability protection, pass-through taxation, minimal formality. Profit flows to your personal return and you pay self-employment tax on it. For most small operators this is the right default and the right starting point.

The S-corp election

Once profit is high enough, the election lets you split income between a reasonable salary (subject to payroll tax) and distributions (not subject to self-employment tax). The saving is real, but it comes with payroll filings, a bookkeeping burden and IRS scrutiny of what "reasonable salary" means.

The rough threshold where it starts to pay for itself is somewhere around $40,000–$60,000 of net profit. Below that, the compliance cost usually exceeds the tax saving.

The C-corp

Pays its own tax, which means the classic double-taxation problem on distributed profits. It is what outside investors expect, and it makes sense if you are raising money or retaining significant earnings inside the business. For a service business paying out its profit, it is usually the wrong answer.

Whatever you pick, protect the shield

Liability protection is not automatic and it is not permanent. Courts pierce it when owners treat the entity as an extension of themselves. Keep business and personal money completely separate, keep the annual filings current, and document decisions. Commingling funds is the single fastest way to lose the protection you filed for.