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When starting a business, one of the most important decisions you'll make is choosing the right business structure. Not only does this affect your personal liability, but it also has significant tax implications. In the U.S., small business owners have several options when it comes to choosing the structure of their business, including LLCs (Limited Liability Companies), S-Corporations (S-Corps), and C-Corporations (C-Corps).
Each structure comes with different tax advantages and challenges. In this guide, we'll explore the tax efficiency of each business structure, compare their benefits and drawbacks, and explain how to choose the right one for your business. We'll also dive into advanced concepts like the Qualified Business Income (QBI) Deduction, which can dramatically impact your tax bill.
A Limited Liability Company (LLC) is one of the most popular business structures due to its simplicity and flexibility. It offers limited liability protection, meaning your personal assets are generally protected from business debts and lawsuits. LLCs are also pass-through entities, meaning the profits and losses of the business pass through to the owners' personal tax returns, avoiding double taxation.
An S-Corporation (S-Corp) is a tax election available to businesses formed as a C-Corp or LLC. S-Corps provide the same limited liability protection as an LLC but offer the added benefit of pass-through taxation — like an LLC. However, the income distribution between salary and dividends is key, and shareholders can avoid self-employment tax on dividends.
A C-Corporation (C-Corp) is a separate legal entity that pays corporate taxes on its earnings. Unlike LLCs and S-Corps, C-Corps pay tax on their profits and then again on the dividends they distribute to shareholders, resulting in double taxation. Despite this, C-Corps are advantageous for businesses planning to raise capital, issue stock, or eventually go public.
Both LLCs and S-Corps enjoy the benefit of pass-through taxation. This means that the business itself doesn't pay taxes on the income. Instead, the income passes through to the owners' personal tax returns, and taxes are paid at the individual level.
However, there are key differences. LLC owners typically pay self-employment tax on all income earned by the business. S-Corp owners can take a reasonable salary and avoid self-employment tax on any distributions that exceed the salary.
C-Corps pay corporate income tax on their profits (currently 21% at the federal level). When profits are distributed to shareholders as dividends, they are taxed again at the individual level. This double taxation is a key downside of choosing the C-Corp structure unless the business intends to reinvest profits or eventually go public.
Qualified Business Income (QBI) Deduction: Both LLCs and S-Corps are eligible for the 20% pass-through deduction under Section 199A of the IRS code, which allows small business owners to deduct up to 20% of their qualified business income from their taxable income. (See below for more on this.)
Self-Employment Tax: LLC owners face self-employment tax on all profits. S-Corp owners can potentially reduce their self-employment tax burden by splitting their income between salary and dividends.
The Qualified Business Income (QBI) Deduction allows owners of pass-through entities (LLCs, S-Corps, and sole proprietors) to deduct up to 20% of their qualified business income from their taxable income. This deduction, introduced by the Tax Cuts and Jobs Act, is designed to help small business owners reduce their tax burden.
The QBI deduction applies only to pass-through income (i.e., income generated by LLCs, S-Corps, and sole proprietorships).
For example, if an LLC owner has $100,000 in business income, they could potentially deduct $20,000 (20% of $100,000) from their taxable income.
This deduction does not apply to C-Corps, making pass-through entities like LLCs and S-Corps more attractive for tax savings.
The QBI deduction is subject to income limits. For 2026, the deduction begins to phase out for individuals making approximately $200,000 for single filers and $400,000 for married filing jointly (these thresholds are subject to annual inflation adjustments).
At these higher income levels, the deduction becomes limited and may be reduced based on factors like W-2 wages or qualified property.
This is especially relevant for S-Corps and LLCs that are growing and seeing higher income, as they may need to evaluate other tax planning strategies to continue maximizing their deductions.
Limited liability protection without the complexity of a corporation. Flexible profit distribution — profits can be split among members however they choose. Pass-through taxation and QBI deduction eligibility. Fewer formalities compared to a corporation.
Pass-through taxation, avoiding double taxation. Ability to split income between salary and distributions, potentially reducing self-employment taxes. Eligible for the QBI deduction, making it tax-efficient for eligible owners.
Ability to raise capital easily by issuing stock. C-Corps are ideal for companies planning to go public. Qualified Small Business Stock (QSBS) tax break: C-Corps meeting specific criteria may qualify for tax exclusions on capital gains if shares are held for more than 5 years, with potential exclusions of up to 100% on gains of $10 million or 10 times the adjusted basis, whichever is greater.
Best for solo entrepreneurs and small businesses that don't expect rapid growth or need significant outside funding. Ideal for businesses that need tax simplicity but still want limited liability protection.
A great choice if your business is profitable and you want to reduce self-employment taxes. S-Corp is perfect for businesses with steady income and a small group of owners. Be mindful of S-Corp eligibility limits and compliance requirements.
Best suited for businesses that plan to raise venture capital, issue stock to employees, or eventually go public. C-Corps are ideal for businesses looking to reinvest earnings into the business instead of distributing profits.
At LayerNext, we understand that tax efficiency and financial management are crucial aspects of running a successful business, no matter the structure. Whether you're operating as an LLC, S-Corp, or C-Corp, your choice of entity impacts how your finances are managed and how taxes are paid. While we don't provide entity structure advisory, our AI-powered platform simplifies your bookkeeping, tax preparation, and financial insights, allowing you to focus on growing your business with confidence.
Choosing your business structure affects the way you handle bookkeeping, tax filings, and financial reporting. For example, LLC owners manage distributions and profits differently than S-Corp owners who track both salary and dividends, while C-Corps face more complex capital structure requirements and dividend distributions.
LayerNext seamlessly integrates with your business's financial structure, ensuring you have the right tools to maximize tax efficiency and minimize errors, so you can focus on your business.
LayerNext automatically adapts to your business structure (whether LLC, S-Corp, or C-Corp), ensuring your financials are always organized and compliant. While we don't make entity structure decisions, we provide real-time financial insights to help you track income and expenses, making it easier for your accountant to implement the most tax-efficient strategy based on your current structure.
Our platform offers real-time insights into tax-saving opportunities such as QBI deductions, helping you see how your current structure affects your tax savings. You'll receive alerts when new strategies could optimize your tax burden or inform you when changes in your revenue levels might warrant a structural review.
Whether you’re running an LLC, S-Corp, or C-Corp, LayerNext helps track your financial metrics, reconcile accounts, and prepare for tax season — all within an automated system that adapts to your business’s needs, no matter what entity you choose. From profit distributions in an LLC to payroll management in S-Corps, LayerNext streamlines your bookkeeping across all structures.
LayerNext doesn’t just report, we help you optimize tax savings as your business grows. Our AI-powered platform gives you actionable recommendations for tax-saving strategies and helps you track taxable income in real-time, so you can make informed decisions that maximize your financial efficiency.
Unlike traditional methods that require manual entry and reconciliation headaches, LayerNext automates your bookkeeping, ensuring your books are always closed and audit-ready. We handle the complex tasks of categorizing transactions, reconciling accounts, and generating reports, while you focus on scaling your business.
Choosing the right business structure is only the first step. Managing your finances efficiently and staying tax‑ready within that structure is what leads to long-term success. LayerNext provides you with the tools and real‑time insights to make informed financial decisions, no matter which entity structure you’ve chosen.
Let LayerNext handle your bookkeeping and financial intelligence while you focus on growing your business and optimizing your tax efficiency.
Choosing the right business structure LLC, S-Corp, or C-Corp is crucial to optimizing your tax efficiency and ensuring long-term business success. While LayerNext doesn’t provide direct guidance on which structure to choose, it helps you maximize tax savings and streamline financial management once you've made that decision. With our AI-powered platform, you can confidently navigate your financials, prepare for tax season, and keep your books organized no matter which business structure you use.
Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex and subject to change. Please consult with a qualified tax professional or financial advisor to discuss your specific situation and ensure compliance with current regulations.
