LLC, S-Corp, C-Corp, Partnership, and Disregarded Entity: A Primer

Choosing a business entity involves two separate decisions that are easy to confuse: the legal form of the business and how it is taxed. The legal forms are sole proprietorship, partnership, limited liability company (LLC), and corporation; the tax treatments are disregarded entity, partnership, S corporation, and C corporation. The key insight is that these are not the same list. An LLC, in particular, is a legal structure that can elect to be taxed in several different ways, as a disregarded entity, a partnership, an S corporation, or a C corporation, which is what makes it so flexible. In broad terms, pass-through treatments (disregarded, partnership, S corp) avoid a separate layer of business tax and report income on the owners' returns, while a C corporation is taxed as its own entity at a flat 21% federal rate and again when it distributes profits. The right choice depends on the number of owners, how profits will be used, liability concerns, self-employment tax, and long-term goals such as raising capital or selling the business.

Legal form versus tax classification: why the distinction matters

This distinction is the source of most confusion, so it is worth stating plainly. When you form a business, you choose a legal entity under state law, which governs liability, ownership, and governance. Separately, the federal tax code decides how that entity is taxed, and for many entities you can elect the tax treatment through what is called the "check-the-box" system.

A corporation is taxed as a C corporation by default but can elect S corporation status. An LLC is the most flexible: a single-member LLC is taxed as a disregarded entity by default, a multi-member LLC as a partnership by default, and either can elect to be taxed as an S or C corporation instead. So when someone asks "should I be an LLC or an S-corp?" the precise answer is that an LLC is a legal entity and an S-corp is a tax election, and an LLC can be the thing that makes the S-corp election. Keeping the two layers separate is the first step to choosing well.

What is a disregarded entity?

A disregarded entity is a business that is ignored for federal income tax purposes and treated as part of its owner. The most common example is a single-member LLC that has made no other election: legally it is a separate company that provides liability protection, but for taxes its income and expenses are reported directly on the owner's return, typically Schedule C for an individual, as if the LLC did not exist.

The appeal is simplicity combined with liability protection. The owner gets the legal separation of an LLC without a separate tax return for the business. The income is subject to ordinary income tax and, for active business income, self-employment tax. A disregarded entity suits a solo owner who wants liability protection and minimal complexity, and it can always elect a different tax treatment later as the business grows.

How is a partnership taxed?

A partnership is the default tax treatment for a business with two or more owners that has not elected corporate status, including a multi-member LLC and a general or limited partnership. It is a pass-through: the partnership itself pays no federal income tax. Instead it files an information return (Form 1065) and issues each owner a Schedule K-1 reporting their share of income, deductions, and credits, which the owners report on their personal returns. We explain how to read that form in how to read a Schedule K-1.

Partnership taxation is flexible and powerful. It allows special allocations of income and loss among owners, flexible distributions, and basis rules that can let owners deduct losses and receive distributions tax-efficiently. Active partners generally pay self-employment tax on their share of business income. Partnerships are the standard structure for businesses with multiple owners who want pass-through treatment and flexibility, including most real estate and investment partnerships and family limited partnerships used in estate planning.

What is an S corporation, and why do people elect it?

An S corporation is a tax election, available to eligible corporations and LLCs, that combines pass-through taxation with a potential self-employment tax advantage. Like a partnership, an S corp pays no entity-level federal income tax; it files Form 1120-S and passes income to owners via K-1s. What distinguishes it is how owner compensation is treated.

An owner who works in an S corporation must be paid "reasonable compensation" as a W-2 salary, which is subject to payroll taxes. Profits above that salary can be taken as distributions that are generally not subject to self-employment or payroll tax. This is the central appeal: by splitting income into a reasonable salary plus distributions, an owner can reduce self-employment tax compared with a sole proprietorship or partnership, where all active income is typically subject to it. The "reasonable" requirement is real and enforced; paying an artificially low salary to dodge payroll tax invites IRS challenge.

S corporations carry restrictions that limit who can use them: generally no more than 100 shareholders, shareholders must be U.S. individuals or certain trusts and estates (no corporate or foreign owners), and there can be only one class of stock. Those constraints make the S corp a poor fit for businesses that want outside institutional investors or multiple share classes, but a strong fit for profitable closely held operating businesses.

How is a C corporation taxed, and when does double taxation pay off?

A C corporation is a separate taxpayer. It pays federal corporate income tax at a flat 21% rate on its profits, and when it distributes those profits as dividends, shareholders pay tax again on the dividends. This is the well-known "double taxation" of C corporations.

Double taxation sounds like a disadvantage, and often it is, but the C corporation has offsetting strengths that make it the right choice in specific cases. Because the corporate rate is a flat 21%, a company that reinvests its profits rather than distributing them can compound earnings at a relatively low tax cost, deferring the second layer until distribution. C corporations can have unlimited shareholders, foreign and entity owners, and multiple classes of stock, which is why venture-backed startups are almost always C corporations. They can also offer the broadest range of tax-favored fringe benefits. And critically for founders, only C corporation stock can qualify for the Qualified Small Business Stock (QSBS) exclusion under Section 1202, which can exempt a large amount of gain from federal tax on a sale, a benefit we cover in QSBS after the One Big Beautiful Bill. For a business that plans to raise venture capital, retain and reinvest earnings, or position for a QSBS-eligible sale, the C corporation's advantages can outweigh double taxation.

The pass-through tax picture and the QBI deduction

For pass-through entities, owners pay tax at their individual rates, which reach 37% at the top. The Qualified Business Income (QBI) deduction under Section 199A can reduce that burden by allowing eligible owners to deduct up to 20% of qualified business income, effectively lowering the top rate on that income to roughly 29.6%. The One Big Beautiful Bill Act made the QBI deduction permanent and, for 2026, expanded the income ranges over which it phases out for specified service businesses (to $75,000 above the threshold for single filers and $150,000 for joint filers) and added a minimum deduction for active owners with at least $1,000 of QBI. Reasonable compensation paid to an S corporation owner is excluded from QBI, one of several interactions that make entity choice and compensation planning intertwined. The comparison many owners weigh is the effective pass-through rate after QBI against the C corporation's 21% rate plus the eventual tax on distributions, which is why the decision turns heavily on whether profits will be distributed or reinvested.

How the options compare

When does it make sense to use one versus another?

There is no universally best entity; the right choice follows the facts. A solo owner who wants liability protection and simplicity often starts as a single-member LLC (disregarded). When multiple owners are involved and flexibility matters, particularly in real estate or investment ventures, a partnership (commonly a multi-member LLC) is the workhorse. When a closely held business becomes consistently profitable and the owner is paying substantial self-employment tax, electing S corporation status can produce real savings, provided a reasonable salary is paid. When the goal is to raise institutional capital, bring in foreign or entity investors, issue multiple stock classes, retain and reinvest earnings at the 21% rate, or pursue a QSBS-eligible exit, a C corporation is often the answer despite double taxation.

Entity choice also interacts with estate and succession planning, valuation discounts, and a future sale, which is why it should not be made in isolation. We connect these threads in estate planning for business owners and selling your business. Because the decision blends tax, legal, and personal-financial considerations, it is one to make with your CPA and attorney rather than from a template.

A worked example: an S election that lowers self-employment tax

The following is a hypothetical illustration, not tax advice for any reader. A consultant operates as a single-member LLC (disregarded) and nets $300,000 of business income, all of it subject to self-employment tax. She elects S corporation status and sets a reasonable salary of $150,000, which is subject to payroll tax, taking the remaining $150,000 as a distribution not subject to self-employment or payroll tax. The portion of Medicare and Social Security tax she avoids on that $150,000 distribution can amount to several thousand dollars a year, net of the added cost of running payroll and a separate return. The savings are real but depend entirely on the salary being defensible as reasonable for her work; an artificially low salary would not survive scrutiny. The figures are hypothetical and simplified, and the QBI interaction would need to be modeled in a real analysis.

Frequently asked questions

Is an LLC the same as an S-corp?No. An LLC is a legal entity formed under state law; an S corp is a federal tax election. An LLC can choose to be taxed as a disregarded entity, partnership, S corporation, or C corporation. So an LLC can elect to be an S corp for tax purposes while remaining an LLC legally.

What is a disregarded entity?A business, usually a single-member LLC, that is ignored for federal income tax and treated as part of its owner. It provides legal liability protection but reports income directly on the owner's return rather than filing a separate business return.

Why would someone choose an S corporation?Mainly to reduce self-employment tax. An S corp owner who works in the business takes a reasonable salary (subject to payroll tax) plus distributions (generally not subject to self-employment tax), which can save tax for a profitable closely held business. It also keeps pass-through treatment.

When is a C corporation better despite double taxation?When the business will raise venture capital, have foreign or entity owners or multiple stock classes, reinvest profits at the flat 21% corporate rate rather than distribute them, or aim for a QSBS-eligible sale under Section 1202. Those advantages can outweigh the second layer of tax.

How does the QBI deduction affect the choice?The Section 199A QBI deduction, made permanent by the One Big Beautiful Bill Act, lets many pass-through owners deduct up to 20% of qualified business income, lowering the effective top rate toward 29.6%. That improves the pass-through case relative to a C corporation, though limitations apply to certain service businesses and to S-corp owner salaries.

Can I change my entity or tax election later?Often yes. Businesses commonly start simple and elect S corporation status or convert to a C corporation as they grow. Changes have tax consequences and timing rules, so they should be planned with your CPA and attorney rather than done reactively.