Entity choice affects taxes. LLCs taxed differently. S-Corps taxed differently. C-Corps taxed differently.
Most owners choose entity without understanding tax impact. They make expensive mistakes. They pay more than necessary.
Entity structure determines tax treatment. Understanding differences saves money. It enables strategy.
This guide shows how LLC vs. S-Corp vs. C-Corp affects your tax bill.
Key Takeaways
- Understand differences—learn tax treatment
- Compare structures—see tax impact
- Choose strategically—select best structure
- Plan taxes—optimize tax strategy
- Save money—reduce tax burden
Table of Contents
Entity Tax Overview
Entity structure determines tax treatment. Each structure has different rules. Each affects your tax bill.
LLCs have flexibility: Pass-through taxation. Self-employment taxes. Flexible structure.
S-Corps have benefits: Pass-through taxation. Potential self-employment tax savings. Ownership restrictions.
C-Corps have complexity: Corporate taxation. Double taxation risk. More complexity.
Why this matters: Entity understanding enables strategy. If you understand entity, strategy improves.
LLC Taxation
LLCs use pass-through taxation. Income passes to owners. Owners pay taxes.
How LLCs Are Taxed
Pass-through structure:
- Business income passes to owners
- Owners report on personal returns
- No corporate tax
- Self-employment taxes apply
Why this matters: Pass-through taxation affects tax bill. If you understand pass-through, tax bill becomes clear.
Self-Employment Taxes
Self-employment tax applies:
- On all business income
- Social Security and Medicare
- Higher rate than W-2
- No employer match
Why this matters: Self-employment taxes increase cost. If you understand self-employment taxes, cost becomes clear.
Tax Flexibility
LLCs offer flexibility:
- Can elect S-Corp status
- Can elect C-Corp status
- Can remain pass-through
- Options exist
Why this matters: Flexibility enables strategy. If you have flexibility, strategy becomes possible.
Pro tip: Use our TAM Calculator to evaluate market opportunity and inform business planning. Calculate market size to understand growth potential.
S-Corp Taxation
S-Corps use pass-through taxation with potential savings. Income passes to owners. Self-employment tax savings possible.
How S-Corps Are Taxed
Pass-through structure:
- Business income passes to owners
- Owners report on personal returns
- No corporate tax
- Salary vs. distribution split
Why this matters: Pass-through taxation affects tax bill. If you understand pass-through, tax bill becomes clear.
Self-Employment Tax Savings
Potential savings:
- Salary subject to self-employment tax
- Distributions not subject to self-employment tax
- Reasonable salary required
- Savings depend on split
Why this matters: Self-employment tax savings reduce cost. If you understand savings, cost decreases.
Ownership Restrictions
S-Corp limitations:
- Limited number of owners
- Limited owner types
- No corporate owners
- Restrictions apply
Why this matters: Ownership restrictions limit flexibility. If you understand restrictions, flexibility becomes clear.
C-Corp Taxation
C-Corps use corporate taxation. Business pays corporate tax. Owners pay personal tax on distributions.
How C-Corps Are Taxed
Corporate taxation:
- Business pays corporate income tax
- Owners pay personal tax on distributions
- Double taxation risk
- Corporate tax rate applies
Why this matters: Corporate taxation affects tax bill. If you understand corporate taxation, tax bill becomes clear.
Double Taxation
Double taxation occurs:
- Corporate income taxed at corporate rate
- Distributions taxed at personal rate
- Total tax higher
- Planning can reduce
Why this matters: Double taxation increases cost. If you understand double taxation, cost becomes clear.
Tax Planning Opportunities
Planning opportunities exist:
- Retained earnings strategies
- Salary vs. distribution planning
- Corporate tax deductions
- Long-term planning
Why this matters: Planning opportunities reduce taxes. If you understand opportunities, taxes decrease.
Comparison
Quick comparison of tax treatment:
| Aspect | LLC | S-Corp | C-Corp |
|---|---|---|---|
| Tax Structure | Pass-through | Pass-through | Corporate |
| Self-Employment Tax | On all income | On salary only | On salary only |
| Corporate Tax | No | No | Yes |
| Double Taxation | No | No | Yes |
| Flexibility | High | Medium | Low |
Why this matters: Comparison enables decisions. If you compare structures, decisions improve.
Pro tip: Use our TAM Calculator to evaluate market opportunity and inform business planning. Calculate market size to understand growth potential.
Your Next Steps
Entity tax strategy affects your tax bill. Understand differences, compare structures, choose strategically, plan taxes, then save money to reduce tax burden.
This Week:
- Begin understanding entity tax differences using our TAM Calculator
- Start comparing structures
- Begin evaluating your situation
- Start planning tax strategy
This Month:
- Complete understanding of differences
- Compare all structures
- Evaluate your situation
- Develop tax strategy
Going Forward:
- Continuously evaluate structure
- Plan taxes strategically
- Optimize tax strategy
- Save money
Need help? Check out our TAM Calculator for market evaluation, our tax basics guide for fundamentals, our tax strategy hub for tactics, and our working with tax pro guide for professionals.
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Sources & Additional Information
This guide provides general information about entity tax strategy. Your specific situation may require different considerations.
For market size analysis, see our TAM Calculator.
Consult with professionals for advice specific to your situation.
