The Difference Between LLC, S-Corp, and C-Corp

Your legal structure isn’t just a formality—it’s a strategic decision. In this video, Steve breaks down the key differences between LLCs, S-Corps, and C-Corps so you can choose the right setup for your business.

You’ll learn how each structure impacts taxes, liability, and growth potential—plus the pros and cons that most founders overlook. Whether you’re launching a new business or thinking about restructuring, this is the clarity you need to make a smart, future-proof decision.

TRANSCRIPT:

Hey, it's Steve. In this video, I'm going to walk you through the different legal entity structures that exist in the United States and what I wish I would have known back in the day when I was starting my first company. Just as a disclaimer, this is for informational purposes only, so make sure you consult your own legal counsel for advice specific to your situation.

Let's go ahead and jump in. Now, there are different legal entities that exist out there. We're going to start with the most basic form, which is DBA, also known as a sole proprietorship or just doing business as.

So if you want to start a business and you're not sure you want to go through the process of forming a legal entity, creating a website, getting business cards, all this stuff—and if you just want to test things—you can start selling products and services right now. And you can do this as a sole proprietor. You're basically just leveraging your social security number when you go to file your taxes and report the income and expenses of this enterprise.

This has the most risk, although it's the easiest to set up, because you will be personally liable for all liability within your company. So this right here, sure, it's easy to set up, but I would definitely recommend avoiding this because you can't have any stock in this business as well. So it limits investors and everything else. It's easy to set up if you just have a side hustle, but it doesn’t protect you from liability—hence I would avoid it.

Okay. The next structure I want to mention is an LLC, which stands for a limited liability company. You can form this pretty easily. A lot of the businesses that I've started and ran—even big companies—when I was CFO of a solar company, we were doing over $400 million a year as an LLC. So this could be a really good structure that limits liability and creates a lot of flexibility within the business.

You can be taxed by default as a partnership as an LLC. What this means is that if you do nothing, if you just form an LLC, your taxes flow through as a partnership. Any money that you make in this business, the net income flows through to your personal taxes and comes through a K-1. The LLC itself does not pay any taxes because it's treated as a disregarded entity.

Now, you can file a specific election to be treated and taxed as an S-corp. You're still an LLC, but you can be taxed as an S-corp instead. I’ll come back to that in a second.

The next type of entity is a subchapter S, also known as an S-corporation. This is an actual corporation that you can form. This too is a pass-through entity. The net income you earn is reported on the K-1 and hits the personal tax returns of the owners. So the S-corp itself does not pay any taxes. That money just flows through and the individuals end up paying the taxes.

Then we have a C-corp. This entity structure is really common with publicly traded businesses. The C-corp does pay taxes. So it pays taxes and then it distributes money to individuals. Then those individuals have to report those dividends on their taxes and pay taxes as well. This is where you get double taxation with a C-corp.

There are a lot of other pros and cons with a C-corp, but for now, let’s keep it focused on the DBA, the LLC, the S-corp, and the C-corp.

The only other type of entity I’ll mention—but won’t go into—is a partnership. Two people can form one. But partnerships can be unstable due to disagreements and unclear decision rights, and sometimes the whole entity blows up.

Let’s get into some bonus material. If this is making sense, can I get a yes in the comments box? If you already own a business entity, drop a comment and let me know what type of structure you have. And if you have feedback or want me to go deeper on any of these topics, let me know and I’ll create more content.

A lot of accountants are looking to create value beyond filing tax returns. One thing they do is say, "Hey, you’re an LLC? File form 2553 with the IRS, and you can be taxed as an S-corp." But here’s the thing—it doesn’t mean you become an S-corp. That’s really important. Many business owners tell me, “I’m an S-corp,” but legally they’re still an LLC—they’re just taxed as an S-corp.

If you meet certain criteria and file this election, accountants will tell you they saved you all this money. But this can be misleading. It doesn’t mean converting to an S-corp is a bad idea, but there are caveats.

Here are the limitations. As an S-corp, you can only have one type of stock. You can only have U.S. individual investors. That means entities like LLCs or C-corps cannot invest in an S-corp. If you try to raise capital and an entity wants to invest, they can’t.

Distributions have to be made pro rata to all shareholders. In an LLC, you can take distributions however you want, but in an S-corp, if one distribution is made, everyone gets one based on their ownership percentage.

There are also compliance costs. You have to document meetings, keep formal records, and follow corporate procedures. Otherwise, if you don’t run your S-corp properly, someone can “pierce the corporate veil” and come after you personally.

There’s also a phase-out issue. With a typical LLC, you have revenue, expenses, and profit. This profit flows to the individual, and you pay self-employment tax on all of it.

If you’re taxed as an S-corp, you pay yourself a W-2 wage. Let’s say $100,000. That is subject to payroll taxes. Then you have profit left over, and you can take distributions, which are not subject to Social Security and Medicare taxes—hence, the savings.

But Social Security taxes phase out after a certain income threshold. Also, you must pay yourself a fair market salary. You can’t pay yourself $50K and take $500K in distributions to avoid taxes.

This matters because if you choose the S-corp structure early on and your company grows, raising capital becomes difficult. Converting to a different entity later can create major tax issues.

Also, never own real estate in an S-corp. It’s a bad idea. If you do, you’ll likely pay more in taxes. Real estate should be held in a separate LLC.

As a CFO, I’ve seen how the wrong structure can prevent key strategic moves. One company I worked with was doing a billion in revenue and was structured as an S-corp. It owned a series of LLCs underneath, but we couldn’t raise capital at the holding company level. Converting would have triggered huge tax costs.

That’s why I wanted to share these high-level insights with you. Again, this is for informational purposes only. Consult your legal advisor for guidance.

I hope this helped you identify some potential traps. Thanks for watching. Be sure to subscribe if you want to be notified when I drop future videos.

In the meantime, take care of yourself. Cheers.