LLC vs. S-Corp vs. C-Corp: Differences for Founders

Choosing the right business structure affects taxes, liability, and operations. Understanding the differences helps you make the right choice for your goals.

LLC (Limited Liability Company)

• Flexible management structure
• Pass-through taxation (default)
• Can elect S-Corp tax treatment
• Less formal requirements

S-Corporation

• Pass-through taxation
• Potential self-employment tax savings
• Restrictions on shareholders
• Formal requirements

C-Corporation

• Double taxation (corporate and individual)
• Unlimited shareholders
• Preferred for raising capital
• Stock options for employees

The C-Corp Advantage: QSBS (Section 1202)

While LLCs are great for detailed tax flow-through, C-Corps have a massive ace in the hole for venture-backed startups: Qualified Small Business Stock (QSBS). Under Section 1202 of the tax code, if a founder holds shares in a C-Corp for 5+ years (and the company meets certain criteria like having under $50M in assets at issuance), they may exclude up to $10 million (or 10x basis) of capital gains from federal taxes.

This is why every Silicon Valley investor demands a Delaware C-Corp. If you plan to raise venture capital, an LLC is often a non-starter.

Converting from LLC to C-Corp

Many businesses start as an LLC for simplicity and later convert to a C-Corp to take investment. This is done via "Statutory Conversion." While possible, it can be expensive and complex if you wait too long. It's often better to start with the "end in mind." If you are a lifestyle business, stay LLC. If you want an IPO, go C-Corp.

The S-Corp Election: When Math Beats Ego

Founders often rush to become an S-Corp to save on self-employment taxes (the 15.3% FICA hit). However, there is a breakeven point. Running an S-Corp requires running payroll (paying a "Reasonable Salary" to yourself), paying unemployment insurance, and filing a separate 1120-S tax return. This administrative overhead costs $2k-$4k a year.

Rule of Thumb: Generally, the S-Corp election makes sense when the business is netting over $80,000 in profit per year. Below that, the tax savings are usually eaten up by payroll provider fees and accounting costs.

QSBS (Qualified Small Business Stock): The Exit Goldmine

If you plan to sell your startup for millions, the C-Corp is the only vehicle that qualifies for Section 1202 QSBS exclusion. This allows you to exclude up to $10 Million (or 10x your basis) of gain from federal taxes upon exit, provided you held the stock for 5 years. LLCs do not qualify.

Do I need a lawyer to form an LLC?

You *can* file Articles of Organization yourself, but the real value is in the Operating Agreement. Using a generic online template can leave you exposed to "piercing the corporate veil" if you don't actually treat the business as a separate entity.

What is "Double Taxation"?

C-Corps pay tax on profit (21% federal), and then shareholders pay tax again on dividends. S-Corps and LLCs avoid this first layer. However, if a C-Corp reinvests all profit (like Amazon), it pays no dividends, mitigating this issue.

Disclaimer: This article is for general information only and is not legal advice.