LLC, S corporation or C corporation? Choosing by owner status, state, business type and growth plans

An LLC and a corporation are legal forms under state law: they determine liability protection and how the company is run. Sole proprietorship, partnership, S corporation and C corporation are federal tax classifications: they determine how tax is figured. Look at the two layers separately. An LLC can be taxed as a sole proprietorship or partnership, or elect to be taxed as an S or C corporation.

the left column is what you form with the state; the right columns show how it's taxed federally.

Formed with the state as	Taxed by default as	Can elect
Single-member LLC (U.S. owner)	Sole proprietorship, on Schedule C / E of the owner's Form 1040	S corporation (Form 2553) or C corporation (Form 8832)
Single-member LLC (foreign owner)	Disregarded entity filing a pro forma 1120 + Form 5472	C corporation (not S)
Multi-member LLC	Partnership, Form 1065, with a K-1 for each member	S corporation (if every owner qualifies) or C corporation
Corporation (Inc. / Corp.)	C corporation, Form 1120	S corporation (Form 2553)

Key points:

• Liability protection: LLCs and corporations both separate business debts from personal assets, as long as accounts are kept separate and the company is run as a company.
• Changing an LLC's tax classification: after electing C corporation status on Form 8832, you generally can't change again for 60 months. A new entity's first election doesn't count.
• An S corporation isn't a type of company: it's a tax election (Form 2553) that LLCs and corporations can both make.

LLCs (sole proprietorship or partnership) and S corporations are pass-throughs: the company pays no federal income tax and the profit flows to the owners' personal returns. The difference is that an LLC owner pays 15.3% self-employment tax on all profit, while an S corporation owner pays payroll taxes only on a reasonable salary. A C corporation pays 21% itself, and shareholders are taxed again on dividends.

compare the three classifications item by item.

Item	LLC (sole prop / partnership)	S corporation	C corporation
Entity-level income tax	None; profit passes through	None; profit passes through	21%
Owner's Social Security and Medicare	15.3% self-employment tax on all profit	Only on salary (split between company and owner)	Only on salary
Taking money out	Draws anytime, no extra tax	Distributions beyond salary avoid payroll taxes	Dividends taxed again at 0% / 15% / 20%
20% QBI deduction	Yes	Yes	No
Owner restrictions	None	Up to 100, U.S. citizens or tax residents and the like	None
Returns	Schedule C / Form 1065	Form 1120-S + a K-1 for each owner	Form 1120
Bookkeeping and payroll	Simplest	Owner must take a reasonable salary through payroll	Corporate books; dividends documented

A simple example: a consulting business with $120,000 of profit a year.

• As an LLC: most of the $120,000 is subject to 15.3% self-employment tax, plus personal income tax.
• With an S election: the owner takes a reasonable salary (say $60,000), and only the salary bears payroll taxes. The rest of the profit is still subject to income tax but not payroll taxes. The cost is running payroll, filing Form 1120-S and somewhat higher accounting fees.
• As a C corporation: the company pays 21% first, and money kept in the company isn't taxed again for now. Dividends are taxed when paid out. This suits owners who plan to reinvest most of the profit.

The actual savings depend on your profit, salary, state taxes and household situation. Our S corporation guide goes through the math in more detail.

Owner status mostly matters for S corporations: shareholders must be U.S. citizens or U.S. tax-resident individuals (plus estates, certain trusts and some tax-exempt organizations). A foreign owner, a foreign company or a corporate owner rules out an S election, and an existing S corporation's election ends as soon as an ineligible shareholder comes in.

find the row for the owner's tax status. This is tax status, not immigration status.

Owner	LLC	S corporation	C corporation
U.S. citizen or green card holder	Yes	Yes	Yes
Visa holder in the U.S. who is a tax resident under the substantial presence test (e.g. most H-1B and L-1)	Yes	Yes, as long as they stay a tax resident	Yes
F-1 or J-1 student or scholar (usually a nonresident for the first years)	Yes	No (while a nonresident)	Yes
Foreign person living abroad	Yes; a single-member LLC files Form 5472	No	Yes; dividends face 30% withholding, generally 10% for China residents under the treaty
Foreign company or U.S. parent company	Yes	No	Yes; common for parent–subsidiary setups

Keep in mind:

• Tax status changes: an H-1B holder moving home, an F-1 student becoming a tax resident, or a green card holder giving up the card all affect S corporation eligibility. Check right away when an owner's status changes.
• Foreign-owned LLCs: a single-member LLC files a pro forma 1120 and Form 5472 every year, with a $25,000 penalty per missed form. A multi-member LLC is taxed as a partnership and must withhold tax on foreign partners' effectively connected income.
• Whether you may work for your own company is an immigration question: owning a company on a visa isn't the same as being allowed to work for it. This guide covers tax and corporate matters only, not work authorization.
• Getting an EIN: a responsible party with an SSN or ITIN can apply online; without one, fax Form SS-4.

The state you form in and the state where you operate and pay state tax are two different things. You generally register and pay tax where you and the business actually are. Forming in Delaware or Wyoming just to "save tax" often means registering as a foreign entity at home as well, with a second annual fee.

find the row for the state; each state's official fee schedule controls.

State	LLC	S corporation	C corporation
North Carolina	Annual report $200 ($203 online)	S status recognized; franchise tax (minimum $200)	2% corporate income tax (2026, with further cuts scheduled) + franchise tax (minimum $200)
Delaware	$400 annual tax (from tax year 2026)	An LLC with an S election still pays the LLC tax; a corporation files an annual report and franchise tax	Investor-friendly; annual report + franchise tax
Wyoming	Annual report, minimum $60	No state income tax	No state income tax
California	$800 minimum each year, plus an LLC fee at higher revenue	$800 minimum, 1.5% state tax	$800 minimum, 8.84% state tax
New York	Publication requirement after formation	Recognized by the state; New York City doesn't recognize S status and taxes it as a corporation	State and NYC corporate tax
Texas	Franchise tax; below the state threshold no tax is due, but an information report is still filed each year	Same	Same; Texas has no personal income tax
Florida	No personal income tax	Generally no state corporate tax	5.5% corporate income tax

Simple rules for choosing a state:

• You and the business are in one state (a restaurant or a consulting practice in North Carolina, say): form there. It's the simplest.
• Raising venture capital or possibly going public: most use a Delaware C corporation, which investors and lawyers know well.
• You live abroad and sell online: Wyoming and Delaware LLCs are common, but warehouses and employees create state tax obligations too (see our guide on choosing a state).
• With an S election: check whether your state recognizes S status. North Carolina does; New York City doesn't.

The type of business determines how profitable it is, whether it needs investors and whether its assets appreciate, all of which drive the choice.

find the row for the business. It's a starting point; the final choice depends on the numbers.

Business	Common choice	Why
Rental property, real estate holding	LLC (taxed as individual or partnership)	Real estate in an S or C corporation is heavily taxed when taken out or sold; an LLC also works with financing and title arrangements
Consulting, design, IT and other personal services	Start as an LLC, elect S once profit is steady	Profit comes mainly from the owner's work, so S savings on self-employment tax are clearest
Restaurants, retail, nail salons, tea shops and other local businesses	LLC, then consider S as it grows	Employees mean payroll anyway; with volatile profit, don't rush the S election
E-commerce (Amazon, TikTok Shop, Shopify)	U.S. owners: LLC or S; foreign owners: LLC or C	Platforms need an EIN and tax documentation; foreign owners can't elect S
Tech startups raising capital	Delaware C corporation	Investors want preferred stock and an option pool; C corporation stock may qualify for the Section 1202 exclusion
A Chinese company's U.S. subsidiary	C corporation	A corporate parent can't own an S corporation; related-party transactions and Form 5472 need planning together
Holding other companies' shares	Depends; often an LLC or C corporation	Depends on dividends, a later sale and cross-border tax

Look three to five years ahead: will you raise money, will profits be paid out or reinvested, and how might you eventually exit?

• You'll run it yourself and pay profits out: an LLC or S corporation is usually cheaper, with only one layer of tax.
• Most profit will be reinvested: the C corporation's 21% rate may help, though dividends are taxed again later.
• Venture capital or equity investment: generally requires a C corporation. An S corporation allows one class of stock and limits who can own it, which investors usually won't accept.
• Selling the company someday: C corporation stock that qualifies under Section 1202 and was issued after July 4, 2025 can exclude up to $15,000,000 of gain per company (or 10 times basis), if the company's gross assets don't exceed $75,000,000. Selling an LLC or S corporation often lets the buyer step up the basis of the assets, which has value too.
• Foreign owners or overseas branches later: an S corporation will be restricted, so plan ahead.

Usually yes, but some directions carry a tax cost, so it pays to choose well at the start.

• LLC to S corporation: file Form 2553 within 2 months and 15 days after the start of the tax year it should take effect (or any time in the prior year). Late-election relief exists.
• LLC to C corporation: Form 8832, or a state-law conversion to a corporation. Usually tax-free, but you generally can't switch back within 60 months.
• S corporation to C corporation: revoke the S election; you generally can't re-elect S for 5 years.
• C corporation to S corporation: allowed, but selling assets that had appreciated before the switch within 5 years triggers built-in gains tax under C corporation rules.
• Moving real estate or other assets out of a company: an S or C corporation distributing appreciated property is generally treated as selling it at market value. That's another reason real estate usually sits in an LLC.

First answer three questions: who the owners are (their tax status), which state the business is in, and how you plan to grow over the next three to five years.

• Situation A: U.S. citizen or green card holder, solo service business, just starting. Form an LLC in your home state; elect S once profit is steady and meaningful after a reasonable salary.
• Situation B: on an H-1B or F-1 and want to start a company. First confirm whether your tax status allows an S election. Whether you may work for your own company on a visa is an immigration question to settle separately.
• Situation C: living abroad and starting a U.S. company for e-commerce or contract work. An LLC (with Form 5472 each year) or a C corporation; no S election. Choose the state based on where warehouses, employees and partners are.
• Situation D: raising investment, or a Chinese parent setting up a U.S. subsidiary. Usually a C corporation (VC-backed companies mostly use Delaware). Plan Section 1202, related-party transactions and the cross-border structure together.