Which business structure is right for you? LLC vs. C-Corp vs. S-Corp
Choosing your legal structure affects your liability, taxes, compliance work, and ability to attract investors. Most founders consider an LLC, a C corporation (C-Corp), or an S corporation (S-Corp). The "S" refers to Subchapter S of the Internal Revenue Code, and it's a tax election, not a separate type of state entity.
- Small business or freelancer? An LLC is usually the simplest option.
- Raising investors, planning an exit, or want QSBS? A C-Corp is typically the right choice.
- Want pass-through taxation with possible self-employment tax savings? Consider an S-Corp election.
Limited Liability Company (LLC)
Choose it when: you want liability protection with flexibility; you prefer pass-through taxation; you're a solo owner or a small partnership; you don't plan to raise venture capital; and you want fewer formalities.
Downsides: members generally pay self-employment tax on their share of profits, and investors usually prefer corporations.
C corporation (C-Corp)
Choose it when: you plan to raise capital, since corporations can issue stock; you want to retain profits at the corporate rate; you want a clear ownership and succession structure; or you want potential QSBS benefits.
Downsides: double taxation (corporate tax, then tax on dividends) and more formalities and reporting.
QSBS (Internal Revenue Code §1202), updated for 2025
Qualified small business stock lets eligible non-corporate shareholders of a C-Corp exclude some or all of their gain on a sale. The 2025 law expanded the benefit for stock acquired after July 4, 2025:
| Acquired on or before July 4, 2025 | Acquired after July 4, 2025 | |
|---|---|---|
| Holding period / exclusion | 5+ years: up to 100% (for stock acquired after Sept. 27, 2010) | 3 years: 50% · 4 years: 75% · 5+ years: 100% |
| Per-issuer gain cap | Greater of $10M or 10× basis | Greater of $15M or 10× basis (inflation-indexed after 2026) |
| Corporate gross-asset limit at issuance | $50M | $75M (inflation-indexed after 2026) |
Other key conditions still apply: the company must be a domestic C-Corp (LLCs taxed as partnerships and S-Corps don't qualify); the stock generally must be acquired at original issuance; and the business must be in a qualified trade or business (many service fields, such as health, law, consulting, finance, and accounting, are excluded). Pre-July 5, 2025 stock can't be "reset" into the new tiers.
S corporation (S-Corp: a Subchapter S election)
Choose it when: you want to reduce self-employment tax by paying yourself a reasonable salary and taking the remaining profit as distributions; you'll have a small number of eligible owners; and you want pass-through taxation.
Downsides:
- Ownership limits: no more than 100 shareholders and one class of stock. Shareholders must generally be U.S. citizens or residents who are individuals, though certain trusts and estates are also allowed. Partnerships, corporations, and nonresident aliens can't be shareholders.
- More formalities than an LLC.
- Reasonable salary is required before distributions.
- No QSBS: S-Corp stock doesn't qualify.
Sources
- 26 U.S.C. §1202, as amended (Office of the Law Revision Counsel): uscode.house.gov
- Paul Hastings, "Qualified Small Business Stock Tax Benefits Expanded…" (2025): paulhastings.com
- Mintz, "QSBS Benefits Expanded Under One Big Beautiful Bill Act" (July 9, 2025): mintz.com
- Perkins Coie, "Significant Changes by the OBBBA to the QSBS Provisions of Section 1202": perkinscoie
General information, not tax or legal advice.