Business Entity Taxes: Sole Proprietor vs. LLC vs. S-Corp vs. C-Corp

Quick Answer

Sole proprietor: simplest, 15.3% SE tax on all income. LLC: flexible, same tax as sole proprietor (unless elect S-corp). S-corp: pay yourself W-2 salary + dividends, saves 15.3% SE tax on dividend portion (savings $3k–$10k+/year if >$40k profit). C-corp: highest tax (double taxation on profits).

Sole Proprietor (No Structure)

• No entity: you are the business
• Taxes: Schedule C, pay 15.3% SE tax on all net income
• Liability: unlimited (personal assets at risk)
• Simplicity: highest
• Best for: new/low-income businesses (<$40k net income)

Example: $50k net profit = $7,650 SE tax (15.3% × $50k × 92.35%).

LLC (Limited Liability Company)

• Default: pass-through taxation (taxed like sole proprietor)
• Liability: limited (business assets separate from personal)
• Cost: $100–$500 state filing
• Taxes: Schedule C (1-member) or Schedule E/K-1 (multi-member)

Tax benefit: NONE unless you elect S-corp taxation (see below).

LLC Electing S-Corp Taxation

• Structure: LLC, but file 2553 election to be taxed as S-corp
• SE tax savings: You pay yourself W-2 salary (subject to FICA), then take profits as "distributions" (NOT subject to SE tax)
• Strategy: Pay $40k salary (FICA: $6,120), take $10k distribution (no SE tax) = saves $1,530 SE tax

Tax savings threshold: profitable if >$40k net income.

S-Corp Structure

• Entity: S-corp (state registration + IRS 2553 election)
• Taxation: pass-through (no entity-level tax)
• SE tax savings: same as LLC electing S-corp
• Cost: $150–$500 state filing, more accounting ($500–$2000/year)

Best when: >$50k net profit (savings justify accounting cost).

Example: $60k profit

• Salary: $45,000 (FICA: $6,885)
• Distributions: $15,000 (no SE tax)
• Total SE savings: $15,000 × 15.3% = $2,295 saved

C-Corp Structure

• Taxation: double taxation (C-corp pays tax, then shareholders pay tax on dividends)
• Rate: 21% flat corporate tax + 20% dividend tax = 36.15% combined
• Use: rarely beneficial (unless retaining earnings in business)

Example: $100k profit

• C-corp tax: $100k × 21% = $21k
• Remaining: $79k
• Dividend tax: $79k × 20% = $15,800
• Total tax: $36,800 (36.8% effective rate)

Choosing Your Entity

Transition Strategy

1. Start as sole proprietor (no cost, simple)
2. At $40k+ profit: form LLC + elect S-corp
3. At $100k+ profit: review C-corp (rarely beneficial)

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