Should my business be an LLC, S-Corp, or C-Corp for tax purposes?

This is probably the most common question small business owners ask, and the answer almost always starts the same way. Form an LLC first. Then decide about your tax election based on how the numbers look.

An LLC by itself is not a tax classification. It’s a legal structure that protects your personal assets. The IRS ignores it for tax purposes and treats a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership. All of the net profit flows through to your personal return and is subject to both income tax and self-employment tax. That self-employment tax is 15.3% on the first $168,600 of net earnings (2024 figures) and 2.9% above that. It adds up fast.

An S-Corp is a tax election you make with the IRS, not a different type of business entity. You can keep your LLC and simply file Form 2553 to be taxed as an S-Corp. The difference is how you take money out. As an S-Corp, you pay yourself a reasonable salary through payroll. That salary gets hit with payroll taxes just like any employee. But the profit above your salary comes out as a distribution, and distributions are not subject to self-employment tax. If your business nets $120,000 and you pay yourself a $60,000 salary, you save roughly $9,000 in self-employment tax on the distribution portion. That’s real money.

The catch is that S-Corp status comes with costs. You have to run payroll, file quarterly payroll tax returns, prepare W-2s, and file a separate S-Corp tax return (Form 1120-S) in addition to your personal return. Between payroll service fees and the additional tax filing, you might spend $2,000 to $4,000 more per year. So if your business only nets $40,000, the self-employment tax savings don’t outweigh the added cost and complexity. The breakeven point varies, but most CPAs look for consistent net profit of $50,000 or more before recommending the S-Corp election.

The “reasonable salary” piece is where people get into trouble. You can’t pay yourself $20,000 and take $100,000 in distributions. The IRS expects your salary to reflect what someone doing your job would earn in the market. For a contractor in the Tampa Bay area running their own crew, that number might be $55,000 to $75,000. For a consultant, it depends on industry norms. Get this wrong and the IRS can reclassify your distributions as wages and charge back payroll taxes plus penalties.

C-Corps are a different animal. They pay tax at the corporate level at a flat 21% federal rate. When you take money out as dividends, you pay tax again on your personal return. This double taxation makes C-Corps a poor choice for most small, owner-operated businesses. They can make sense in specific situations like retaining large amounts of earnings in the company, attracting outside investors, or qualifying for the Qualified Small Business Stock exclusion. But for a landscaping company, dental practice, or cleaning service, a C-Corp is almost never the right answer.

Florida has no state income tax on individuals, which simplifies things. But Florida does impose a corporate income tax on C-Corps (5.5% on income over $50,000). S-Corps and LLCs taxed as sole proprietorships or partnerships pass income to the owner’s personal return, where Florida’s lack of income tax works in your favor.

The right approach is to start as an LLC, get your small business bookkeeping set up properly so you actually know your net profit, and then evaluate the S-Corp election once you have a clear picture of your numbers. Making this decision based on a guess or a tip from a friend usually leads to either paying more in taxes than you need to or creating complexity that isn’t worth it yet.

If you’re starting a new business or thinking about restructuring, talk to a CPA before filing anything. The entity decision affects everything from how you file taxes to how you take money out of the business. Our business formation work includes walking you through these options with actual numbers so you can make the decision based on your situation, not a generic rule of thumb.