In the LLC vs C corp decision, both structures protect your personal assets from business debts, so the choice usually turns on tax and on whether you plan to raise outside money. An LLC passes its profit through to the owners' personal returns, where it is taxed once. A C corp pays a flat 21% federal tax on its own profit, and shareholders pay tax again on any dividends.
For an owner who takes the profit home each year, the LLC usually costs less in tax and paperwork. A C corp tends to win when you will raise venture capital, issue stock options, keep most profit inside the business, or want the qualified small business stock (QSBS) exclusion on a future sale. This guide compares LLC vs C corp on liability, 2026 tax rules, self-employment tax, the qualified business income (QBI) deduction, QSBS, fundraising, conversion and state fees, then runs a worked example with 2026 brackets.
| Factor | LLC (default tax treatment) | C corp |
|---|---|---|
| Liability protection | Yes, for members | Yes, for shareholders |
| Federal income tax | Passed through to owners; taxed once at personal rates | 21% at the entity, then tax on dividends paid out |
| Self-employment tax | Generally on active owners' share of profit | None; owner-employees pay FICA on salary only |
| QBI deduction | Up to 20% of qualified business income | Not available to the corporation |
| QSBS exclusion on sale | Not available while taxed as a partnership or disregarded entity | Available for qualifying stock |
| Owners and stock | Flexible membership, operating agreement | Unlimited shareholders, multiple stock classes |
| Investor appeal | Limited for venture funds | Standard for venture funding |
| Formalities | Light | Board, officers, minutes, Form 1120 |
An LLC and a C corp are both legal entities separate from their owners. If the business is sued or defaults on a loan, creditors generally reach business assets, and your home and savings stay outside the claim. That protection depends on behaving like a separate entity: a separate bank account, signed contracts in the company name, adequate capital, and records that show business money stayed in the business.
The difference is upkeep. A corporation needs a board, officers, bylaws, annual meetings and minutes in most states. An LLC runs on an operating agreement with fewer required formalities. Mixing personal and business funds weakens protection in either structure, so clean bookkeeping matters as much as the entity choice.
The IRS treats a single-member LLC as "an entity disregarded as separate from its owner" and a domestic LLC with two or more members as a partnership, unless it elects otherwise, according to the IRS LLC guidance. The business files no income tax of its own in the single-member case. Profit lands on Schedule C, or on the members' K-1s for a multi-member LLC, and is taxed at each owner's 2026 rate. Our single-member LLC taxation guide walks through the filing mechanics.
An LLC can also file Form 8832 to be taxed as a corporation, or elect S corp status. The Form 8832 entity classification election explains how and when to file it. That means the LLC vs C corp choice is partly a legal one and partly a tax election.
Under 26 U.S.C. 11(b), corporate tax "shall be 21 percent of taxable income." When the corporation pays out after-tax profit as a qualified dividend, the shareholder pays tax at capital gain rates. For 2026, a single filer pays 0% on qualified dividends up to $49,450 of taxable income and 15% up to $545,500, with 20% above that, per Rev. Proc. 2025-32 in IRB 2025-45. Higher earners can also owe the 3.8% net investment income tax on dividends once modified AGI passes $200,000 for a single filer.
Salary paid to an owner who works in the business is deductible by the corporation, so many owners take a market-rate salary and leave the rest in the company. Retained profit is taxed only at 21% until it is distributed. Our C corp guide covers corporate filing deadlines, and the accumulated earnings tax explains the penalty for hoarding cash without a business reason.
Self-employment tax is the main extra cost an active LLC owner carries. The IRS self-employment tax topic sets the rate at 12.4% for Social Security and 2.9% for Medicare, applied to 92.35% of net earnings, and lets you deduct one-half of the tax when figuring adjusted gross income. The Social Security part stops at the wage base, which the IRS payroll tax topic puts at $184,500 for 2026. Medicare has no cap.
A C corp owner pays FICA only on wages. The corporation and the employee each pay 6.2% Social Security and 1.45% Medicare on salary, and profit left in the company or paid as dividends carries no payroll tax. Owners who want to cut self-employment tax while keeping pass-through treatment often elect S corp status instead, which our guide to sole proprietorship vs S corp compares in detail.
The QBI deduction offsets much of the LLC's payroll-tax disadvantage. Section 199A allows a deduction of 20% of qualified business income, capped at 20% of taxable income above net capital gain, and it applies only to a "taxpayer other than a corporation." P.L. 119-21, the One Big Beautiful Bill Act signed on 4 July 2025, removed the rule that ended the deduction after 2025, so it is now permanent. The same law widened the phase-in range to $75,000 ($150,000 for joint returns) and added a $400 minimum deduction for owners with at least $1,000 of QBI from businesses in which they materially participate.
For 2026, the wage and service-business limits start once taxable income passes $201,750 for a single filer and are fully phased in at $276,750, per Rev. Proc. 2025-32. Below the threshold, most LLC owners get the full 20%. Our 199A deduction guide covers the limits above it.
This illustrative example uses one owner, a single filer with no other income, $200,000 of business profit, the 2026 standard deduction of $16,100 and the 2026 single brackets from Rev. Proc. 2025-32. It ignores state tax. In the C corp case, the owner takes a $100,000 salary, treated here as reasonable pay for the work.
LLC (disregarded entity)
C corp
| Outcome (federal only, 2026) | LLC | C corp, all profit paid out | C corp, profit retained |
|---|---|---|---|
| Payroll or self-employment tax | $28,234.30 | $15,300.00 | $15,300.00 |
| Corporate tax | $0 | $19,393.50 | $19,393.50 |
| Owner income tax | $25,196.31 | $24,113.48 | $13,170.00 |
| Total federal tax | $53,430.61 | $58,806.98 | $47,863.50 |
| Share of $200,000 profit | 26.7% | 29.4% | 23.9% |
When everything comes out, the LLC owner pays about $5,376 less. When the C corp keeps $72,956.50 inside for growth, this year's bill drops to $47,863.50, though the owner only has $79,180 of take-home salary and the retained cash will face dividend or sale tax later. Change the salary, the profit level or the payout and the ranking can flip, so model your own figures before you file.
The QSBS exclusion under Section 1202 applies only to stock in "any domestic corporation which is a C corporation," acquired at original issue. LLC interests do not qualify. P.L. 119-21 rewrote the rules for stock issued after 4 July 2025:
A founder who expects a sale worth several million dollars can save far more through QSBS than the yearly cost of double taxation. Our QSBS exclusion guide covers the active business and industry tests in detail. Founders receiving vesting shares should also read up on the 83(b) election and its short filing deadline.
Venture funds and many angel investors invest through preferred stock in a C corp, usually a Delaware corporation. A corporation can issue several classes of stock, grant options from a stock plan, and add new shareholders without amending a partnership-style agreement. An LLC can take investors, but each member gets a K-1 and taxable income allocations even when no cash is distributed, and many funds avoid that structure. This is market practice, so confirm the preference of your specific investors.
For an owner-operated business funded from profits or bank loans, an LLC is rarely a barrier. Real estate is a separate case, where holding property in a corporation creates its own problems on sale and refinancing, as covered in our real estate C corporation setup guide.
Moving from an LLC to a C corp is usually straightforward. An LLC can elect corporate tax treatment on Form 8832, convert under state law, or transfer its assets to a new corporation for stock. A transfer for stock can be tax-free under the rules in our Section 351 transfer guide. For QSBS, stock received for property counts as acquired on the date of the exchange, and its basis is at least the fair market value of the property contributed. Gain built up while you were an LLC therefore stays outside the exclusion, and the holding period starts at conversion.
Going the other way costs more. Under 26 U.S.C. 336, a liquidating corporation recognizes gain on its assets as if it sold them at fair market value, and under Section 331 shareholders treat what they receive as payment for their stock. Unwinding a profitable C corp can trigger tax at both levels. Many owners start as an LLC and convert once a funding round is near.
State costs differ by entity type and state. In Delaware, the Division of Corporations charges LLCs an annual tax of $400 due by June 1. Corporations pay a minimum franchise tax of $175 under the authorized shares method or $400 under the assumed par value capital method, plus a $50 annual report fee, due by March 1. Our Delaware franchise tax guide shows how the authorized shares method can produce a large bill for startups with many shares.
Other states charge formation fees, annual report fees and minimum taxes that may apply to both structures, and you also pay to register in each state where you do business. Add the professional cost: a C corp files Form 1120 and runs payroll for owner salaries, while a multi-member LLC files a partnership return and issues K-1s. For a wider view that includes partnerships, see our business entity selection guide.
An LLC tends to fit when:
A C corp tends to fit when:
If your profit is steady and you want lower payroll tax without double taxation, an S corp election on an LLC is the third route to price out.
Is an LLC or a C corp better for taxes in 2026? For an owner who takes profit out each year, an LLC usually produces a lower total bill because profit is taxed once and the permanent QBI deduction reduces it. A C corp can cost less while profit stays inside the business at 21%, and it is the only structure eligible for QSBS.
Can an LLC be taxed as a C corp? Yes. An LLC can file Form 8832 to be classified as a corporation for federal tax while remaining an LLC under state law. Stock-based plans and QSBS planning usually still call for a state-law conversion to a corporation.
Do C corp owners pay self-employment tax? No. An owner who works in a C corp pays FICA on salary through payroll, split between the employee and the corporation. Dividends and retained profit carry no payroll tax.
Does an LLC qualify for QSBS? An LLC taxed as a partnership or disregarded entity does not, because Section 1202 covers only stock in a domestic C corporation. Converting to a C corp can start the QSBS holding period, but gain that built up before the conversion is not excluded.
Should a startup be an LLC or a C corp? A startup that plans to raise venture capital usually forms as a C corp, often in Delaware, because investors and option plans expect corporate stock. A self-funded business with early losses may start as an LLC and convert later, accepting that QSBS only covers growth after conversion.
Madras Accountancy helps US businesses and CPA firms with bookkeeping, tax preparation, payroll and CFO-level advisory for LLCs and C corps alike, including entity comparisons built on your own numbers. To talk through your structure, contact our team.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
