S Corp, LLC, or C Corp – Choosing the Right Structure

Choosing the right business structure shapes your taxes, compliance, and growth options. This guide compares S Corp vs LLC in Texas and C Corp fundamentals so you can make a confident, informed decision.

Overview of Business Entity Types

Understanding LLCs, S Corporations, and C Corporations

An LLC is a flexible legal entity that, by default, is taxed as a pass-through (profits flow to owners’ personal returns). An S Corporation is not a separate entity type—it’s a federal tax election for eligible LLCs or corporations that allows pass-through taxation and separates owner pay into salary and distributions. A C Corporation is a separate taxable entity that pays corporate income tax; owners are taxed again on dividends, which can be useful in specific growth or investment scenarios.

Taxation Comparison

How each structure impacts your tax bill

  • LLC (no S election): All net profits are generally subject to self-employment tax for single-member owners or active partners; income passes through to your personal return and may qualify for the 20% QBI deduction (subject to limits).

  • S Corporation: Profits pass through; payroll taxes apply to the owner’s reasonable salary while properly characterized distributions are generally not subject to self-employment tax; requires an 1120-S return and may preserve some QBI on qualified pass-through income.

  • C Corporation: Pays 21% federal corporate income tax; dividends to owners are taxed again at the personal level (double taxation). In Texas, there’s no personal state income tax, but double taxation still occurs at the federal level; salaries to owner-employees are subject to payroll taxes.

Legal and Operational Considerations

Liability, formalities, and ownership rules

All three structures offer liability protection when properly maintained. LLCs typically require fewer formalities; corporations (S or C) involve bylaws, annual meetings, and stock records—areas Gray & Associates can support through corporate compliance services. S Corps have eligibility limits: generally 100 shareholders, U.S. persons, and one class of stock. LLCs and C Corps allow broader ownership types and multiple classes, which may matter for outside investment.

Which Is Best for You?

Matching the structure to your goals and profit level

For many profitable small businesses, an S Corporation often yields tax savings by reducing exposure to self-employment taxes while keeping pass-through treatment. If profits are modest or unpredictable, remaining an LLC (default taxation) can keep costs and complexity low until revenue grows. A C Corporation may fit companies seeking venture capital, stock plans, or long-term reinvestment—less common for local service businesses but right in specific cases.

Case Scenarios

Quick examples to self-identify

A consultant netting ~$120k in profit may benefit from an S Corporation after setting a defensible salary and taking distributions. A side-gig earning ~$10k may be better off as an LLC taxed by default until income rises. A startup planning outside investment and equity pools may prefer a C Corporation for capitalization flexibility.

Transitioning Entity Types

Adjust as your business evolves

You can start as an LLC and elect S Corporation status later; a timely Form 2553 (or late-election relief when available) makes the change. It’s also possible to revoke an S election or restructure if circumstances shift. Gray & Associates evaluates eligibility, timing, payroll impact, and compliance so transitions are smooth and well-documented.

Get Professional Advice

Make a decision with clear numbers and a plan

Structure choice affects taxes, compensation, ownership, and admin workload. We model side-by-side outcomes, recommend the right path, and handle filings and setup. When an S Corporation is appropriate, we coordinate formation, election, payroll, and year-round planning so the structure supports both compliance and savings.