Should You Structure Your Business as an LLC, S-Corp or C-Corp?

When starting or growing a business, one of the most important decisions you’ll make is how to structure it legally. Choosing between an LLC, S-Corporation (S-Corp) or C-Corporation (C-Corp) impacts everything from how you’re taxed to your personal liability and long-term growth potential. Each structure offers unique advantages—and trade-offs.

LLC: Flexibility and Simplicity

A Limited Liability Company (LLC) offers a flexible, straightforward structure that combines the pass-through taxation of a sole proprietorship with the legal protections of a corporation. Profits and losses are passed through directly to the owners (called members), which avoids the double taxation faced by some corporations. LLCs are ideal for small business owners and real estate investors looking for liability protection without the administrative complexity of a corporation.

However, LLCs can be less attractive for investors. Venture capital firms and institutional investors typically prefer corporations due to share structure and legal clarity. Also, while LLCs can elect to be taxed as S-Corps, they are generally subject to self-employment taxes on all profits unless structured carefully.

S-Corp: Tax Efficiency for Active Owners

An S-Corporation is a tax designation—not a legal entity. Corporations and LLCs can elect S-Corp status if they meet IRS criteria. The major advantage? Owners can split income between salary and distributions, potentially saving on self-employment taxes. Only the salary portion is subject to payroll taxes, while distributions are not.

S-Corps do have restrictions: only U.S. citizens or residents can be shareholders, and the company is limited to 100 shareholders. The IRS also expects shareholders to pay themselves a “reasonable salary,” which can become a compliance issue if abused. That said, for service-based businesses or those with steady income, S-Corp taxation can lead to significant savings.

C-Corp: Ideal for Growth and Outside Investment

A C-Corporation is the default corporate structure under U.S. tax law. It offers unlimited growth potential through stock issuance and is favored by investors. C-Corps also provide the strongest liability protection and can retain earnings for reinvestment, which isn’t possible with pass-through entities.

The downside? C-Corps are subject to double taxation. Profits are taxed at the corporate level, and dividends are taxed again at the shareholder level. However, with the current flat corporate tax rate of 21%, many businesses still find this manageable—especially when aiming to scale or go public.

Choosing the Right Business Structure

There’s no one-size-fits-all answer. Your ideal structure depends on your goals, how you earn revenue, whether you plan to take on investors, and your preferred tax treatment. At Illumination Wealth, we help entrepreneurs align their business structure with their financial plan to support long-term success and tax efficiency. Contact us today for help with all your business and tax planning needs.