LLC vs S-Corp vs C-Corp: Which Is Best for You in 2025?

More than 5 million new business applications were filed across the United States last year, according to the U.S. Census Bureau. That pace set a record and continues to carry into 2025.

The Small Business Administration reports that more than 21 million business applications have been submitted since 2021, far above pre-pandemic levels. That surge reflects a permanent shift in how many Americans think about work and ownership.

Freelancers, gig workers, and small teams are building companies from home offices and laptops. But before most of those ventures can actually operate, every founder faces a critical first decision: how to structure their business.

That choice, whether to form an LLC, an S-Corporation, or a C-Corporation, will determine how profits are taxed, how liability is handled, and how growth is financed. 

It influences whether an entrepreneur can attract investors, structure employee equity plans, or keep full control of operations. And as tax regulations continue evolving in 2025, with modified deduction rules and new credits reshaping the landscape, the stakes of this decision have only intensified. 

Choosing the right structure protects personal assets from business liabilities, minimizes tax obligations, and creates pathways for sustainable growth. Choosing the wrong one locks founders into rigid constraints, triggers unexpected costs, or leaves them dangerously exposed when challenges arise. "The most successful founders we work with treat entity selection like any other strategic decision - they consider multiple scenarios and plan for growth," says Davy Deluge, COO of InCorp. "Understanding how each structure handles taxation, ownership changes, and compliance requirements helps avoid costly surprises."

Grasping the differences between these entity types is not just smart business; it’s a strategic necessity for anyone serious about turning an idea into a durable business.

The Basics: What Each Entity Means

There are three business structures that dominate the American entrepreneurial landscape. Each serves a different purpose and offers its own balance of tax treatment, liability protection, and operational control.

An LLC, or limited liability company, is built for flexibility and personal protection. 
The U.S. Small Business Administration describes an LLC as a structure that “lets you take advantage of the benefits of both the corporation and partnership business structures,” and notes that it generally protects owners’ personal assets, such as a home or savings, if the business faces bankruptcy or lawsuits. 

That protection is one reason LLCs are widely used by freelancers, consultants, and small teams who want formal separation between themselves and the business without the administrative burden of a full corporate structure. 

Unlike a traditional corporation, an LLC does not require board meetings or shareholder minutes in most states, which keeps administrative complexity relatively low for first-time founders and solo operators. 

An S Corporation, often called an S Corp, is not a separate legal structure. It is a tax classification that a qualifying corporation or LLC can elect with the IRS. 
The IRS defines an S Corporation as “a corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes,” which allows owners to avoid corporate-level federal income tax. 

In practice, owners in an S Corp must pay themselves a reasonable salary and then receive any remaining profit as a distribution, which may reduce exposure to certain self-employment taxes. 

This model works well for profitable businesses where owners actively work in the company. However, S-Corps must meet strict IRS requirements: no more than 100 shareholders, all must be U.S. citizens or residents, and only one class of stock is allowed.

A C Corporation, or C Corp, is different. 
The Small Business Administration describes a C Corp as “a legal entity that’s separate from its owners,” and notes that corporations “can make a profit, be taxed, and can be held legally liable.” 

In practical terms, that separation provides maximum flexibility for raising capital through preferred stock, convertible notes, and other securities that investors expect. This structure aligns with traditional venture funding and acquisition paths.

Each structure addresses different business priorities in 2025's entrepreneurial landscape. LLCs balance operational flexibility with liability protection, making them the default choice for many startups. S Corps add tax efficiency for established businesses willing to navigate additional compliance requirements. C Corps provide the sophisticated equity structures that venture capital and public markets demand. The real differences emerge when comparing their treatment of taxes, liability, ownership control, and scaling potential.

The Comparison: How They Differ

Taxation is where the most critical distinctions emerge.

By default, an LLC is treated as a pass-through entity for federal tax purposes. The Small Business Administration explains that profits and losses are reported on the owners’ personal returns rather than being taxed first at the company level.

The SBA also notes that members of an LLC are considered self-employed and must pay self-employment tax on that income, which includes Medicare and Social Security.

In practice, that means the IRS treats the owner’s entire share of profit as active income, and that income is generally subject to the full self-employment tax rate, which the NC State University’s Poole College of Management describes as 15.3 percent when accounting for both the employer and employee portions. This is simple to administer, but it can become expensive as profit grows.

This is where S Corporation status distinguishes itself. An S-Corporation is still a pass-through for federal income tax, but it adds a layer of payroll structure. The IRS states that S Corporations “elect to pass corporate income, losses, deductions, and credits through to their shareholders,” but unlike standard LLC taxation, S-Corps split owner income into two categories with different tax treatments.

The key distinction is how owner compensation is treated. Shareholder employees are expected to take what the IRS calls “reasonable compensation” as wages, which are subject to payroll taxes, and only then take any remaining profit as a distribution. Those distributions are not subject to self-employment tax.

Many profitable small and closely held businesses consider electing S Corporation tax status once they are earning meaningful income above basic operating needs. The appeal lies in potential tax savings, but it comes with scrutiny. The IRS can reclassify distributions as wages and impose back taxes or penalties if an owner’s salary is set artificially low.

C Corporations sit on a different track.

A C Corporation pays its own federal corporate income tax at a flat 21 percent rate, according to analysis from NC State University’s Poole College of Management and the Tax Policy Center. After that, when profits are paid out as dividends, those dividends are taxed again on the shareholder's individual return as qualified dividends, generally at favorable capital gains rates of 15%, or 20% depending on income level.

This is the classic double taxation structure that most pass-through owners try to avoid. The upside is that a C Corporation can leave earnings inside the company to reinvest, can carry forward losses to offset future profits, and can deduct a broader range of expenses at the corporate level. That makes it familiar territory for investors who expect scale.

Ownership and structural limitations also set these entities apart.

An LLC can have one member or many, and most states do not restrict who those members can be. The IRS notes that members can include individuals, corporations, other LLCs, and even foreign owners, and there is no statutory cap on the number of members. That flexibility appeals to private founders who want to bring in partners on negotiated terms.

An S-Corporation is far tighter. The IRS limits S Corporations to no more than 100 shareholders and allows only certain types of owners, generally U.S. individuals, certain trusts, and estates. Partnerships, corporations, and nonresident aliens cannot be shareholders.

S Corporations can issue only one class of stock, which means they cannot easily offer preferred shares with special rights to outside investors. These restrictions make S-Corporation status attractive for controlled, domestic ownership, but less attractive for companies that plan to raise institutional capital.

C Corporations have the broadest path to investment. There are generally fewer limitations on the number or type of shareholders, and stock can be structured in multiple classes with different voting or liquidation rights.

That flexibility is one reason venture-backed and high-growth companies are usually organized as C Corporations. The ability to issue preferred equity and grant stock options is an established expectation for investors and senior hires.

Compliance burden is the final major point of separation. 

LLCs typically face fewer ongoing formalities, which is why the SBA notes they are often easier to operate than traditional corporations. 

S Corporations add more structure. They are expected to maintain shareholder records, run payroll for shareholder employees, observe corporate formalities, and file the S Corporation election with the IRS using Form 2553. Failure to follow those formalities can put their tax status and liability protection at risk.

C Corporations operate with the highest level of corporate governance, including boards, bylaws, shareholder meetings, and detailed reporting. The Small Business Administration notes that corporations “require more extensive record-keeping, operational processes, and reporting,” in exchange for the strongest liability shield and the cleanest path to raising capital.

Ultimately, the right entity choice depends on the business’s goals, profit model, ownership structure, and tolerance for complexity. In 2025, blended approaches are becoming common, such as forming an LLC for flexibility and electing S Corporation taxation to align pay, distributions, and compliance.

The 2025 Context

The 2025 landscape for business entity choice is no longer theoretical. It is being shaped in real time by tax law, investor behavior, and how founders actually work and get paid.

First, the IRS has moved to stabilize reporting and compliance. 

The National Taxpayer Advocate noted that “the 2025 filing season generally went smoothly for taxpayers,” crediting expanded digital services and automation that make it easier for small businesses to stay current on filings. This matters because entity choice only works if the owner can meet the filing obligations that come with it.

That clarity extends to payment reporting. Form 1099-K has been a point of anxiety for online sellers, freelancers, and marketplace operators. The IRS had planned to phase in dramatically lower reporting thresholds, down to $5,000 in 2024 and eventually $600, which would have swept casual sellers and side income into mandatory reporting. 

Lawmakers reversed course in July 2025. Congress’s One Big Beautiful Bill Act restored the longtime Form 1099-K reporting standard to $20,000 and 200 transactions, reversing the phased lower thresholds that were set to apply for 2024-2026. The IRS has since confirmed that the higher threshold now applies going forward. 

The immediate effect is less paperwork for lower-volume sellers and gig workers, and more predictability for founders deciding whether to formalize income as an LLC, elect S Corporation status, or keep revenue inside a C Corporation.

Second, the labor market is pushing more Americans toward self-employment income. 

The Small Business Administration points to continued growth in e-commerce and notes that online channels now account for roughly one-fifth of global retail sales, with that share expected to keep rising. 

The SBA also reports that 53 percent of small businesses are already using AI-powered chatbots and virtual assistants to handle service tasks, with the goal of running leaner and reacting faster. 

The agency puts it plainly for 2025: “There have never been more ways to connect with prospective customers than there are right now.” That shift is driving freelancers and micro teams to adopt formal business structures earlier, often starting as single-member LLCs and adding payroll later.

Third, fundraising expectations continue to steer growth-minded startups toward C Corporations. 

Venture investors expect a C Corporation with the ability to issue multiple classes of stock and grant equity. That structure also positions founders to pursue Qualified Small Business Stock treatment, which can allow significant exclusions on gains if statutory requirements are met. For founders who plan to raise outside capital, that expectation is not softening.

Finally, AI has made it realistic for one person to act more like a staffed company. 
The U.S. Chamber of Commerce reports broad adoption of AI tools across small firms, with business owners using automation to handle big portions of marketing, customer contact, and back office work while keeping headcount low. 

This is accelerating a practical pattern. Solo and service-based businesses are choosing simpler pass-through structures for tax efficiency and control, while high-growth ventures continue to organize as C Corporations for investment and stock-based hiring.

In other words, the choice between LLC, S Corporation, and C Corporation is no longer only about liability. It is about how you expect to get paid, how you expect to raise money, and how you expect to work in 2025.

Example Scenarios

Entity choice often reflects business goals, not just structure. For example, a freelance web designer with modest overhead and variable income might register an LLC to simplify operations while securing liability protection. With no investors to satisfy and little need for complex equity planning, this low-maintenance model aligns with daily realities.

On the other hand, a growing e-commerce brand generating steady profit might elect S-Corp status to reduce self-employment tax exposure. Once payroll systems are in place, the ability to split income between salary and distributions becomes financially meaningful. 

Furthermore, a venture-backed AI startup would likely form a C Corporation to meet investor expectations, offer stock options, and raise capital. The structure accommodates multiple funding rounds and supports scalable ownership.

Each of these cases reveals how structure follows strategy. As attorney Mark Kalish observed in Entrepreneur, “Each situation I’ve been involved with has been different. You can’t just make an assumption that one form is better than another.”

The right choice starts by understanding what your business is built to do. The next step is knowing how to weigh that decision.

The Decision Framework

Choosing the right business structure isn’t a branding exercise. It’s a legal and financial commitment with long-term implications. Before filing anything, ask yourself:

1. Do I plan to raise outside funding soon?

If yes, prioritize a C Corporation for equity tools and investor expectations. If no, keep pass-through options on the table.

2. Do I want flexibility in ownership and management?

If you need flexible profit splits or simple governance, an LLC offers wide latitude under state law. If you need formal boards and stock classes, corporations provide that kind of structure. The SBA and IRS outline these differences in their entity guides.

3. How important are tax savings versus administrative simplicity?

If simplicity and direct reporting matter most, default LLC taxation is straightforward. If payroll is feasible and profits are steady, an S Corporation election can change how employment taxes apply under the IRS's reasonable compensation rules. If you plan to retain earnings and build a stock-based plan, a C Corporation aligns with that model.

4. Will I hire employees or run solo for a while? 

Hiring staff often shifts the calculus toward corporate structures, especially for offering benefits and equity. On the other hand, if you plan to operate solo, a structure with lighter compliance, like an LLC, may be more practical.

5. Do I expect to operate across states or sell internationally? 

Multi-state operations create nexus and filing requirements that may narrow your options. Some structures handle this complexity better than others, particularly when foreign ownership is involved.

6. Will I be holding real estate or IP assets within the business?

This is a key tax consideration. As the Poole College of Management at NC State University notes, extracting real estate or IP from a corporation can trigger significant tax consequences, making initial structure choices even more important.

These questions aren’t just hypothetical; they shape your liability exposure, IRS reporting obligations, and your ability to scale. As The New York Times notes, “forming a new corporation requires some careful planning and a number of key steps.” Start by getting those foundational decisions right. Your answers will define how, and how well, your business grows.

Closing / Takeaway

Choosing between an LLC, S Corporation, or C Corporation isn’t about picking what’s popular. It’s about building a foundation that matches your growth strategy, risk profile, and operational style. Whether you're setting up a lean solo consultancy or preparing for venture funding, the right structure can reduce tax friction, simplify compliance, and support how you want to grow your business.

Entity choice is not one-size-fits-all. The optimal structure for a bootstrapped digital agency isn’t the same as for a venture-backed startup or a family-run property holding company. It all comes down to clarity: on your goals, your timeline, and your tolerance for complexity.

Before filing formation documents or electing a tax status, consult with a trusted CPA or business attorney for guidance. The upfront investment can prevent costly restructuring later and ensure your entity choice aligns with the business you’re building. Not just today, but for years to come.

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