Choosing the right business entity is one of those decisions that often gets made early and then quietly ignored for years. Many business owners form an LLC, file the paperwork, and move on to serving clients and growing revenue. Others are advised to elect S Corp status or incorporate as a C Corp without fully understanding why.
As your business grows, that initial choice can start to matter more than you expect. Entity structure affects how much tax you pay, how you pay yourself, how much administrative work is required, and how flexible your business will be as plans evolve. In 2026, with continued focus on tax efficiency and compliance, revisiting this decision can be especially valuable.
Below, we outline the differences between LLC vs S Corp vs C Corp, explaining when each structure tends to make sense, and highlighting the trade-offs business owners should consider before making a change.
Understanding The Three Common Business Structures
Before comparing outcomes, it helps to understand what each entity actually is and how it functions.
What Is An LLC?
A limited liability company, or LLC, is a legal structure that provides personal liability protection, while offering flexible tax treatment. By default, a single-member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed like a partnership. In both cases, profits pass through to the owners and are reported on their personal tax returns.
One of the biggest advantages of an LLC is simplicity. There are fewer formal requirements than a corporation, and income flows directly to the owners without a separate corporate tax return at the federal level. LLCs can also elect to be taxed as an S Corp or C Corp, if that becomes beneficial later, which makes them a common starting point for professional services businesses.
What Is An S Corporation?
An S Corporation is not a separate legal entity type. It is a tax election made with the IRS. Both LLCs and corporations can elect to be taxed as an S Corp if they meet the eligibility requirements.
S-Corps are pass-through entities, meaning profits are not taxed at the corporate level. Instead, income flows to the owners’ personal returns. The key distinction is how owners are paid. Owner-employees must receive a reasonable salary, which is subject to payroll taxes. Remaining profits can be distributed as dividends, which are not subject to self-employment taxes but still subject to income tax.
This structure can create tax savings once profits reach a certain level, but it also introduces payroll requirements, additional filings, and closer IRS scrutiny around compensation.
What Is A C Corporation?
A C Corporation is a separate legal and tax entity. The business pays corporate income tax on its profits, and owners pay personal tax again when profits are distributed as dividends. This is often referred to as double taxation.
C Corps have more formal requirements, including corporate governance rules, separate tax returns, and stricter recordkeeping. However, they offer flexibility around ownership, equity structure, and long-term growth strategies. For certain businesses, especially those planning to raise outside capital, this structure can be the right fit despite the added complexity.
How Taxes Differ Between LLCs, S Corps, And C Corps
Taxes are usually the main driver behind entity decisions, so understanding how each structure is taxed is essential.
LLCs and S Corps are both pass-through entities. Business income is taxed on the owner’s personal return, regardless of whether the cash is distributed. LLC owners typically pay self-employment tax on the full amount of profit. S Corp owners pay payroll taxes only on their salary, not on distributions, which can reduce overall tax liability when structured properly.
C Corps are taxed at the corporate level first. Profits that remain in the business are taxed at the corporate rate. If profits are distributed to owners, they are taxed again at the individual level. This can result in a higher total tax burden for businesses that regularly distribute profits, but it may work well for companies that plan to reinvest earnings for growth.
Administrative And Compliance Considerations
Beyond taxes, each entity comes with different administrative responsibilities.
LLCs generally have the least complexity. There are fewer formal meetings, simpler reporting requirements, and less ongoing maintenance.
S Corps require payroll processing, quarterly payroll filings, reasonable compensation analysis, and an additional tax return. These requirements add cost and time but are manageable with proper support.
C Corps involve the most formality. Separate corporate tax returns, board documentation, and stricter compliance standards are part of the structure. For businesses that need this framework, the trade-off can be worthwhile, but it is not ideal for owners seeking simplicity.
Common Situations Where A Change May Be Worth Considering
Business owners often revisit entity structure when income increases significantly, when hiring accelerates, or when long-term goals shift. A structure that worked when revenue was modest may no longer be optimal once profits stabilize or expand.
It is also common for owners to outgrow their original setup simply because it was chosen quickly at the beginning. Revisiting this decision with current numbers and future plans in mind can uncover meaningful opportunities.
Before changing or selecting an entity, it helps to step back and ask a few key questions.
- How consistent is your profit from year to year?
- Do you plan to distribute most earnings or reinvest them? How much administrative complexity are you comfortable managing?
- Are you planning to bring on partners or outside investors?
- How closely connected are your personal and business finances?
Clear answers to these questions help ensure that entity decisions support both short-term tax efficiency and long-term business goals.
Bringing It All Together
Choosing between an LLC, S Corp, or C Corp is not about finding a universally better structure. It is about aligning your business entity with how you earn income, how you plan to grow, and how much complexity you want to manage along the way.
At Affinity Accounting, we help business owners look beyond generic advice and make entity decisions based on real numbers and realistic goals. Whether you are forming a new business or wondering if your current structure still makes sense for 2026, planning can make a measurable difference.If you would like help evaluating your entity structure or understanding how it fits into your broader tax and financial strategy, we would be happy to talk.
Reach out to schedule a call with our team and get clarity on the structure that best supports where your business is headed.
