Formation & Compliance

LLC or C corp: what you plan for the next 2 years

A decision table for choosing an LLC or a C corp by your plans for investors, profits, losses, and foreign owners, with 2026 federal tax math comparing the two.

By save biz teamPublished

Two smoked amber glass pieces in a quiet room, a single pane beside a doubled one, the doubled piece casting a deeper amber shadow across a pale floor, suggesting the choice between one layer of tax and two

Key takeaways

  • A C corporation pays a flat 21% federal income tax on its profit, and its shareholders pay tax again when that profit is paid out as dividends. A limited liability company (LLC) is not taxed as an entity by default: its owners report its profit on their own returns.
  • At 2026 top federal rates, $100 of profit paid out by a C corp leaves the owner $60.20 after federal tax. The LLC side counts self-employment tax for an owner who works in the business and already has self-employment income above the Social Security wage base and the Additional Medicare Tax threshold. For that owner, the same $100 earned through an LLC leaves $59.99, or $67.29 when the full qualified business income deduction applies.
  • Only stock in a C corporation can be qualified small business stock, and incentive stock options are options on a corporation's stock. Under Delaware law, a member of an LLC owns an LLC interest, not stock.
  • A C corporation's losses stay with the corporation: shareholders cannot deduct them. An LLC's losses flow to the owners' returns, subject to basis and other limits.
  • Keeping profit inside a C corp postpones the second layer of tax. A corporation that piles up earnings beyond its reasonable business needs, so that its shareholders avoid the dividend tax, can owe a 20% accumulated earnings tax.

Decide by your plans for the next 24 months

If you plan to...This points toWhy
Sell shares to outside investors or grant stock optionsC corpIncentive stock options are options on a corporation's stock, and only C corporation stock can be qualified small business stock. A tax-exempt investor in an LLC taxed as a partnership generally owes tax on its share of the LLC's income from a business unrelated to its exempt purpose
Take most of the profit out each yearDepends on the deductionOne layer of income tax, but an owner who works in the business generally also owes self-employment tax on the profit. At the top bracket, with self-employment income above the Social Security wage base, the totals come out about even unless the qualified business income deduction applies. In an LLC taxed as a partnership, a cash distribution is generally taxed only to the extent it exceeds your basis in your LLC interest
Keep most of the profit in the businessC corp, within limitsThe corporation pays 21% now, and the shareholder-level tax waits until profit is paid out as a dividend or the stock is sold. Accumulating beyond the business's reasonable needs to avoid the shareholders' tax risks a 20% accumulated earnings tax, after a cumulative allowance of at least $250,000, or $150,000 for certain professional service corporations
Lose money in the first yearsLLCLosses reach the owners' returns, within basis, at-risk, passive-activity, and excess business loss limits. A C corporation's losses stay inside it and carry forward against up to 80% of its future taxable income
Work in the business and take payDepends on the numbersLLC owners who work in the business generally owe self-employment tax on their share of the profit. A corporation that pays its working owner a reasonable salary deducts it, and the corporation and the owner each pay Social Security and Medicare taxes on it. Dividends from a corporation are not subject to self-employment tax
Bring in a foreign ownerDepends on the ownerA corporation in which one foreign person owns at least 25% generally files Form 5472 for reportable related-party transactions, and its dividends to foreign shareholders face 30% withholding unless a treaty lowers it. An LLC taxed as a partnership withholds on a foreign partner's share of its US business income
Elect S corporation status insteadNot covered hereAn S corporation cannot have more than 100 shareholders, more than one class of stock, or a nonresident alien shareholder

Plans often fall in more than one row, and the rows can point different ways: a business that plans to raise money from investors may also expect early losses. The investor row turns on what each entity can issue and how investors are taxed; the rows about profit turn on numbers you can price with the math below.

What each entity can issue is set by state law. A Delaware LLC has no stock: 6 Del. C. § 18-101 defines a "limited liability company interest" as "a member's share of the profits and losses of a limited liability company and a member's right to receive distributions." The tax code adds three rules that turn on stock:

  • Section 1202 limits qualified small business stock to stock in a C corporation.
  • Section 422(b) defines incentive stock options as options to buy a corporation's stock.
  • Section 512(c)(1) makes a tax-exempt investor in a partnership include its share of the partnership's income from a business unrelated to its exempt purpose in unrelated business taxable income, "whether or not distributed." Section 511 taxes that income. Dividends from a corporation are generally excluded from it under section 512(b)(1).

Two layers of tax or one: the 2026 federal math

The comparison below uses $100 of profit and these assumptions:

  • The 2026 tax year and federal tax only, with no state tax.
  • An owner in the top income tax bracket, which for 2026 starts above $640,600 of taxable income for single filers and $768,700 for joint filers.
  • A C corp that pays out all of its after-tax profit as qualified dividends. Any salary it pays the owner is outside this comparison.
  • An owner whose modified adjusted gross income is above the net investment income tax threshold.
  • An LLC owner who works in the business, and whose self-employment income is already above the Social Security wage base and the Additional Medicare Tax threshold. For that owner, only the Medicare parts of self-employment tax apply at the margin.
Per $100 of profitC corp, profit paid outLLC, no qualified business income deductionLLC, full 20% deduction
Tax paid by the entity$21.00$0$0
Owner's income tax, including net investment income tax$18.80$36.50$29.20
Owner's self-employment tax$0$3.51$3.51
Total federal tax$39.80$40.01$32.71
Left for the owner$60.20$59.99$67.29

How each number is built:

  • $21.00 is 21% of $100, the corporate rate in section 11(b), "21 percent of taxable income."
  • $18.80 is 20% plus 3.8% on the $79 dividend: the top rate on qualified dividends under section 1(h), and the net investment income tax under section 1411. The 3.8% applies above $200,000 of modified adjusted gross income for single filers, $250,000 for joint filers, and $125,000 for married filing separately. The IRS notes that "these threshold amounts are not indexed for inflation." Both rates apply to the $79 left after corporate tax, which is why the C corp total is 39.8% and not 44.8%.
  • $3.51 is the 2.9% Medicare tax plus the 0.9% Additional Medicare Tax under section 1401(b), applied to $92.35. The $92.35 is the part of each $100 counted as net earnings from self-employment after the deduction in section 1402(a)(12).
  • $36.50 is 37% of $98.66, at the top rate for 2026 (Rev. Proc. 2025-32). Section 164(f) lets the owner deduct half of the self-employment tax other than the Additional Medicare Tax, $1.34 here. The 2025 tax law, Public Law 119-21, removed the end-of-2025 expiration of these brackets.
  • $29.20 is 37% after a full 20% qualified business income deduction under section 199A, which the same law made permanent. The deduction is figured on business income after the deductible part of self-employment tax: 20% of $98.66 is $19.73, which leaves $78.93 taxed at 37%. At the 37% bracket the deduction cannot exceed the greater of two amounts: 50% of the W-2 wages the business pays its employees, or 25% of those wages plus 2.5% of the unadjusted basis of its qualified property. A specified service business, such as law, health, accounting, or consulting, gets none of the deduction at that income level.

Read across the totals. At the top bracket, profit paid out costs about the same in federal tax through a C corp, $39.80, as through an LLC without the qualified business income deduction, $40.01. In this comparison, the LLC comes out well ahead only when the full deduction applies.

Three things move these numbers in practice. An LLC taxed as a partnership or a disregarded entity whose only workers are its founders pays no W-2 wages, because its owners are not its employees. At the top bracket, its owners can be left with little or none of the deduction. For them, the column without the deduction is the closer figure. When the owner's self-employment income is below the Social Security wage base, self-employment tax also includes the 12.4% Social Security part, so the comparison needs your own numbers. The net investment income tax generally does not reach business income from an LLC in which the owner materially participates. It does reach the share of an owner who is passive.

If the C corp keeps the $79 instead of paying it out, only the $21 is due now. The second layer of tax is deferred until a dividend or a sale. That deferral is what the "Keep most of the profit in the business" row relies on.

What each one pays the state: Delaware as the example

As of October 2026, a Delaware LLC pays a flat $400 annual tax by June 1 for the prior calendar year and files no annual report. A Delaware corporation files an annual report by March 1 with a $50 fee. It also pays a franchise tax that starts at $175 under the authorized shares method and rises with the number of authorized shares. The state tells corporations to use whichever method gives the lower tax: authorized shares, or assumed par value capital with a $400 minimum. The corporate franchise tax arithmetic is worked through in the conversion guide. The LLC side is compared with Wyoming in two-year LLC costs in Wyoming and Delaware. An LLC's yearly state filings in five more states are laid out in annual reports and franchise taxes for a new LLC.

Foreign owners: what each form reports and withholds

A foreign owner adds reporting and withholding rules that differ by form.

  • C corp. If a single foreign person owns at least 25% of a US corporation, the corporation generally files Form 5472 for reportable transactions with related parties. Dividends it pays to foreign shareholders face 30% withholding, unless a tax treaty lowers it.
  • LLC taxed as a partnership. Under section 875, a foreign partner is treated as engaged in a US trade or business if the partnership is. Under section 1446, the LLC withholds on the foreign partner's share of its effectively connected income. The IRS instructions for Form 8804 put that rate at 21% for corporate partners and generally 37% for other foreign partners.
  • Single-member LLC. One owned by a foreign person files Form 5472 with a pro forma Form 1120 for years with reportable transactions.

In the table, "Depends on the owner" means two things. The partnership withholding rate turns on whether the partner is a corporation. The dividend withholding rate turns on whether a treaty applies.

If you already have an LLC

An LLC can become a C corp later, by converting under state law, merging into a corporation, contributing the LLC interests to a new corporation, or electing corporate tax treatment. How the IRS treats the change depends on the path. For an LLC taxed as a partnership, a state-law conversion is treated the same way as electing corporate tax treatment (Rev. Rul. 2004-59), while contributing the LLC interests to a new corporation is a different form whose basis and holding period results can differ. The holding period for qualified small business stock starts only at the change, so the timing matters. The paths, filings, and tax treatment are covered in converting an LLC to a C corp.

FAQ

Which is better, an LLC or a C corp? Neither in general. A C corp fits plans to sell stock, grant stock options, or keep profit in the business. An LLC fits plans to use early losses on the owners' own returns, and at the top bracket it comes out ahead on profit taken out mainly when the qualified business income deduction applies.

Who pays more tax, an LLC or a corporation? For an owner who works in the business and whose self-employment income is above the Social Security wage base and the Additional Medicare Tax threshold, the totals at 2026 top federal rates are about even. On $100 of profit paid out, counting self-employment tax, the total is $39.80 for a C corp and its shareholder, and $40.01 for an LLC owner without the qualified business income deduction. With the full deduction, the LLC owner pays $32.71. An owner who is passive generally owes the 3.8% net investment income tax on their share of the LLC's business income. On profit a C corp keeps, it pays $21.00 now, and the second layer of tax is deferred.

What is the biggest disadvantage of a C corp? Profit paid out is taxed twice, once at 21% inside the corporation and again as dividends. The corporation gets no deduction for the dividends it pays, and its shareholders cannot deduct its losses.

What is the biggest disadvantage of an LLC? Its owners are taxed on their share of the profit whether or not the LLC pays it out, and owners who work in the business generally owe self-employment tax on that share. An LLC also issues interests rather than stock, so while it is taxed as a partnership or a disregarded entity it cannot offer qualified small business stock or incentive stock options.

Can a nonresident own either one? Yes, with different reporting. A US corporation in which one foreign person owns at least 25% generally files Form 5472 for related-party transactions and withholds on dividends it pays to foreign shareholders. An LLC taxed as a partnership withholds on a foreign partner's share of its US business income. A single-member LLC owned by a foreign person files Form 5472, attached to a pro forma Form 1120, in any year it has a reportable transaction.

Sources

This guide is general information based on the sources listed above, not legal or tax advice. For decisions about your situation, talk to a licensed attorney, CPA, or enrolled agent.

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