When buying your first business, choosing the right entity structure—whether it’s an S Corporation, C Corporation, or LLC—can have a major impact on your tax savings and liability protection. Each structure offers unique benefits, and understanding how they work can help you make the best decision for tax efficiency, liability management, and future growth.
An S Corporation (S Corp), defined under IRC §1361, is popular among small business owners for its self-employment tax savings. Owners can take part of their income as salary, which is subject to payroll taxes, and the rest as distributions, which are not subject to self-employment tax.
However, the IRS requires that S Corp owners take a “reasonable salary,” so this strategy needs careful handling. Unlike a C Corp, profits from an S Corp aren’t taxed at the corporate level, providing a “pass-through” benefit that can simplify taxation.
A C Corporation (C Corp) is different in that it faces “double taxation.” C Corps pay taxes on profits at the corporate level. Shareholders then pay taxes again if the company distributes dividends. While this may seem like a drawback, C Corps offer advantages for companies that want to raise capital or retain profits for growth without immediate distribution. They also allow more flexibility in structuring ownership and issuing shares, making them attractive for businesses seeking outside investors.
An LLC (Limited Liability Company), by default, is considered a “pass-through” entity. This means the LLC does not pay taxes at the entity level. Instead, income “passes through” to the owners, who pay taxes individually. Single-member LLCs pay taxes as a sole proprietorship, while multi-member LLCs pay taxes as a partnership. LLC owners can choose S Corp or C Corp taxation to better suit their financial goals. This option helps align taxation with their financial goals. Combined with strong liability protection, LLCs are a versatile choice for small businesses with changing income or evolving ownership.
Choosing between an S Corp, C Corp, and LLC depends on your tax and growth strategy. S Corps can reduce self-employment taxes. C Corps provide a structure for larger capital growth. LLCs offer flexible tax treatment with pass-through benefits. Evaluating each option’s tax efficiency, liability protection, and scalability helps you choose the best business structure from the start.
