How LLC vs C-Corp taxation actually works
Choosing between an LLC and a C-Corp is one of the most consequential — and most misunderstood — decisions a US founder makes. The tax difference between the two comes down to one concept: how many times the same dollar of profit gets taxed before it reaches your pocket.
LLC (and other pass-through entities)
An LLC is a pass-through entity. The business itself pays no federal income tax. Instead, all profit “passes through” to the owner's personal return, where it is taxed once. As the owner of an LLC taxed as a sole proprietorship (the default), you pay:
- Self-employment (SE) tax of 15.3% — applied to 92.35% of net business income per Schedule SE, up to the Social Security wage base of 176,100 (and 2.9% Medicare on the amount above that). This covers both the employer and employee halves of Social Security + Medicare.
- Ordinary federal income tax on that same profit, reduced by two deductions: half of the SE tax you paid, and the 20% Qualified Business Income (QBI) deduction — a major 2017 tax-reform benefit for most small businesses.
C-Corp
A C-Corp is a separate taxable entity. The same dollar of profit gets taxed twice before it reaches you:
- Corporate income tax of 21% (flat, post-2017 reform) on the business profit.
- Dividend tax on the qualified dividends you receive when the after-tax profit is distributed to you as a shareholder — taxed at long-term capital gains rates (0%, 15%, or 20%).
This is the infamous “double taxation” of C-Corps. Even though the corporate rate dropped from 35% to 21% in 2017, the second layer of tax on dividends remains.
Worked example at $200,000 profit
Using the calculator above with $200,000 in net business profit (single filer, 2025 federal brackets, standard deduction, no state tax):
| Line item | LLC | C-Corp |
|---|---|---|
| Business profit | $200,000 | $200,000 |
| Corporate tax (21%) | — | −$42,000 |
| Self-employment tax | −$27,193 | — |
| QBI deduction (20%) | −$34,361 | — |
| Dividend tax (LTCG) | — | −$16,448 |
| Ordinary income tax | −$25,833 | — |
| Total federal tax | ~$53,026 | ~$58,448 |
| After-tax income | ~$146,974 | ~$141,552 |
| Effective rate | 26.5% | 29.2% |
At $200k, the LLC saves about $5,400/year in this simplified model. The gap widens with profit: at $1M, the LLC advantage is over $43k/year.
When each structure actually wins
The simplified model above makes the LLC look universally better — but in the real world, the picture is more nuanced. The right entity depends on what you plan to do with the money.
Choose an LLC (or S-Corp) when…
- You plan to distribute most profit to owners. Pass-through taxation is strictly better when cash leaves the business each year. Service businesses, agencies, and consultancies almost always fit this profile.
- You want simple administration. LLCs have lighter compliance — no board, no formal minutes, fewer state filings.
- You qualify for QBI. The 20% QBI deduction is a major ongoing tax break for pass-through entities, with phase-outs only at high income levels and certain service trades.
Choose a C-Corp when…
- You're raising venture capital. VCs and institutional investors almost universally require a C-Corp (preferred stock, familiar governance, clean cap table). An LLC routinely kills a term sheet.
- You plan to reinvest profits rather than distribute them. If the business keeps most of its earnings to fund growth, only the 21%corporate tax applies — no second dividend layer until you actually pay out.
- You want to offer broad equity / RSUs / stock options. C-Corps have a far more mature toolkit for employee equity than LLCs.
- You intend to eventually be acquired or go public. Acquirers and underwriters strongly prefer the certainty of a C-Corp structure.
The takeaway: the tax comparison matters most for lifestyle / cash-flow businesses. For venture-backed startups, the entity choice is largely dictated by investors — and the C-Corp “tax penalty” is a price founders pay willingly in exchange for capital and optionality.
Side-by-side tax comparison
How total federal effective rates compare across profit levels (simplified model):
| Profit | LLC eff. rate | C-Corp eff. rate | LLC annual savings |
|---|---|---|---|
| $50,000 | ~20.2% | ~21.0% | ~$400 |
| $100,000 | ~23.3% | ~25.6% | ~$2,300 |
| $200,000 | ~26.4% | ~29.2% | ~$5,700 |
| $500,000 | ~27.1% | ~31.4% | ~$21,300 |
| $1,000,000 | ~29.1% | ~33.4% | ~$43,100 |
Important caveats (please read)
- Real C-Corps mix salary and dividends. A C-Corp owner typically pays themselves a deductible W-2 salary (which the corp deducts, lowering corporate tax) and dividends only the surplus. Our calculator models the extreme all-dividend case, which overstates the C-Corp's disadvantage at higher profits.
- LLCs can elect S-Corp taxation. Once an LLC is profitable enough, electing S-Corp status (via IRS Form 2553) can materially reduce SE tax by paying the owner a “reasonable salary” and taking the rest as distributions.
- State taxes vary enormously. California charges LLCs an $800 minimum franchise tax plus a gross-receipts fee; Texas has no state income tax but a franchise margin tax. Always model state-level impact.
- QBI has income limits and service-business phase-outs for certain “specified service trades or businesses” (SSTBs) like consulting, law, medicine, and financial services. Above ~$240k single / $480k married (2025), the QBI deduction phases out for SSTBs.
Use this calculator for directional guidance and to build intuition — then have a licensed CPA model your specific numbers before filing.