Here at Alleviate Tax, we’ve helped thousands of small business owners settle their tax debt for less than they owe. But one way to avoid outrageous tax debt is by setting up your corporate structure for certain tax advantages.
Whether you’re just starting a new business, have been a sole proprietor filing as a 1099 contractor and now want to incorporate, or you feel that you could reduce your tax bill in 2025 by changing the way you file your business income, it helps to understand your options.
We have seen many business owners make the wrong choice and then face tax debt they couldn’t handle. If you’re unsure of your smartest move for tax avoidance as a small business owner, it’s best to speak with a tax accountant. A tax accountant or tax lawyer can also help you file the paperwork to become a C Corp, S Corp, or a Limited Liability Company (LLC).
But first, you might be wondering what all these letters mean, including the differences between a C vs S corporation and an LLC.
What Is An LLC?
Limited liability companies, LLCs, are business structures, not tax entities. They are permitted by state statutes so the rules and regulations may differ slightly from state-to-state.
However, all LLCs share at least one thing in common: As a legal entity, they can protect the business owner’s personal assets from legal action or collections placed against the business. That means if your LLC is sued or declares bankruptcy, in most cases, the courts cannot go after your home, vehicle, or savings, income, and investments that are not part of the business.
Owners of LLCs may be individuals, business partners, other corporations or LLCs, or foreign entities, according to IRS.gov.
It’s important to note that banks, insurance companies, and a few other types of businesses specifically related to finance cannot file for LLC status.
An LLC is not a tax filing status; it is a legal entity. The IRS treats LLCs as a corporation (S corp or C corp), partnership, or a “disregarded entity.” If you are the sole owner of the LLC, your business income would “pass-through” to your personal income tax returns on your 1040 tax form at your personal income tax rate. You’d still have to pay self-employment taxes, as well, if you file as a sole proprietor.
It’s typically a good idea to have an LLC to protect your personal assets if your business faces debt, legal action, or other financial hardship. You can file your Articles of Incorporation or Certificate of Incorporation with your state. Filing fees to start an LLC vary by state.
For instance, in California, LlC filing costs include $70 for the Articles of Organization and $20 for the Statement of Information. You can pay a legal firm or use an online service to help you file, or you can do it yourself and pay just the state filing fees.
It’s important to understand that establishing an LLC does not offer any particular tax benefits. That’s where the question of filing as a C vs S Corporation comes in.
What Is an S Corp?
An S corp, short for S corporation, is a tax designation that is considered a “pass-through entity.” That means business income and losses pass through the corporation to be claimed by the individual taxpayer on their 1099 form. If there is more than one S corp owner, the business would file as a partnership and the owners would still claim income and losses on their personal tax returns.
As of 2022, there were more than 5 million S corps in the U.S., according to IRS estimates published by GuidantFinancial.com. That number is likely even higher today as the gig economy grows.
What Is a C Corp?
A C corporation, or C corp, is a business entity that pays taxes as a corporation, not as a pass-through entity. It is named after subchapter “C” of the Internal Revenue code.
Not every business qualifies to file taxes as an S Corp. You cannot file as an S corp if you have more than 100 shareholders, or if shareholders are not U.S. citizens or legal residents. You can’t have multiple classes of stock, either, which can make it difficult to secure outside funding through angel investors or venture capital firms.
C corps have fewer ownership and shareholder restrictions, which means that some larger companies may prefer C corp status. If you plan to take your company public or seek venture capital, a C corp is the better option. S corps have limited options to raise funds through outside investors.
However, the possibility of double taxation and the need to pay corporate income taxes as a C corp means that most small business owners will opt to file as an S corp if they can.
S vs C Corp: Tax Benefits of An S Corp
If you don’t plan to seek investment capital and run a small business or even a sole proprietorship, you might elect to file as an S corp. For most taxpayers, filing as an S corp usually provides several tax advantages.
S corps, unlike sole proprietors, are not subject to self-employment tax. When you file taxes as a W-2 employee, your employer withholds FICA (Federal Insurance Contributions Act) taxes that help fund Medicare and Social Security. These taxes equal 12.4% of your gross pay for Social Security and 2.9% for Medicare. But your employer splits the cost with you, so that you each pay 7.65%.
Sole proprietors who have not filed for S corp election are on the hook for the full 15.3% of FICA taxes. That’s one reason why most independent contractors pay quarterly estimated taxes – to cover self-employment taxes as well as their income tax liabilities for their state and the federal government.
Business owners who file as an S corp also don’t face double taxation. An S corp is a pass-through entity, which means you will only pay individual state and federal income taxes on your earnings. You won’t be subject to the 21% corporate tax.
You can use business losses to offset your income, further reducing your tax liability.
Additionally, through 2025, S corps can claim a 20% qualified business income deduction. This benefit may disappear if the Tax Cuts and Jobs Act tax laws sunset in 2026, however.
S Corp vs C Corp: Are There Any Tax Benefits for a C Corp?
When you file taxes as a c corp, you must pay corporate taxes on business profits. Then, you must claim your business income received on your personal income tax return, taxed at your marginal tax rate. For many business owners, this double taxation leads to a larger overall tax bill.
However, the TCJA of 2017 set the corporate tax rate at 21%. If you are in one of the upper tax brackets, with marginal income tax rates of 22% to 24%, and you don’t plan to take distributions from your corporation, you might legally avoid a higher tax bill by filing as a c corp. This would assume you have other income sources and don’t need to draw a salary from your corporation. For most small business owners, filing as a c corp without receiving dividends isn’t practical.
There may be other circumstances where it makes sense to file as a c corp. But the vast majority of small business owners in the U.S. will reap tax benefits by filing as an s corp.
How to Make An S Corp Election
When you file your Articles of Incorporation, you’ll need to make the choice: S corp or C corp. If you want to file as an S corp, you’ll need to fill out Form 2553 with the IRS.
If you initially elect to be taxed as a c corp and then circumstances change, you can file an S corp election using IRS Form 2553. You must file by the 15th day of the third month (March 15) for your S corp election to be active in that calendar year. If you file after that date without showing a reasonable cause for being late, your s corp election will go into effect the following year.
If you recently started a small business or have been having success as an independent contractor, it might be time to incorporate to take advantage of the tax benefits of an s corp. New business owners can choose to file as an S corp or C corp when they first incorporate.
It’s a good idea to speak to a tax advisor before making any changes that will affect your filing status. Tax experts can help you save money with legal tax avoidance strategies.
People Also Ask
Is S Corp or C corp better for small business?
In most cases, an S corp is better for a small business because, as a pass-through entity, it avoids double taxation.
Should I elect my LLC to be taxed as an S corp?
If you don’t have more than 100 corporate shareholders, international shareholders, or outside investors, you might consider electing to have your LLC taxed as an S corp. An S corp is a pass-through entity, which means you claim business income and losses on your personal income tax forms. By filing as an S corp, you can avoid paying self-employment tax and also avoid double taxation.
