Understanding business entity tax structures (plain-English guide)
1) LLC (pass-through taxation)
An LLC is a legal structure that is often taxed as a sole proprietorship (single-member) or partnership (multi-member). In a basic pass-through setup, the business itself generally does not pay federal income tax; instead, profit is reported on the owner’s return.
- Modeled here: federal + state income tax on business income, plus self-employment tax at 15.3%.
- Common reason it can be costly: self-employment tax can apply to most or all net earnings in this simplified model.
In practice, LLC taxation can be more nuanced. Some owners may qualify for the qualified business income (QBI) deduction, and some income may be subject to different rules depending on the nature of the business. This page keeps the LLC case intentionally straightforward so you can compare it to the S‑Corp and C‑Corp cases using the same starting point: your estimated business income.
2) S‑Corp election (salary + distributions)
An S‑Corp is a tax election that keeps pass-through taxation but changes how owner compensation is treated. Owners who work in the business typically take W‑2 wages (subject to payroll taxes), and remaining profit may be distributed.
- Modeled here: payroll tax on salary, income tax on salary + remaining profit, plus an annual compliance cost.
- Key planning lever: the “reasonable salary” amount. Too low can be risky; too high can reduce the payroll-tax advantage.
When you test S‑Corp scenarios, try a few salary levels and watch how the total changes. If you increase salary, payroll tax increases, but the distribution portion decreases. In the simplified model on this page, income tax is applied to the combined salary and distribution, so the main difference between LLC and S‑Corp is how much of the profit is exposed to the 15.3% payroll/self-employment tax.
3) C‑Corp (corporate tax + dividend tax)
A C‑Corp pays corporate income tax on profits. If profits are distributed to shareholders as dividends, shareholders may pay dividend tax. If profits are retained, the owner may not receive cash that year, but the corporation can reinvest.
- Modeled here: 21% federal corporate tax + state tax on business income, plus 15% dividend tax on distributed after-tax profit.
- When it can look favorable: when a meaningful portion of profits is retained rather than distributed (depending on your real-world facts and tax profile).
The C‑Corp case is where “cash to owner” and “value retained in the business” can diverge. If you distribute 0% of after-tax profits, the owner receives $0 in this model even though the corporation retains earnings. If you distribute 100%, you may see the effect of double taxation: corporate tax first, then dividend tax on the distribution.
Quick comparison table (conceptual)
| Factor | LLC | S‑Corp | C‑Corp |
|---|---|---|---|
| Entity-level federal income tax | Typically none (pass-through) | Typically none (pass-through) | Yes (modeled at 21%) |
| Payroll/self-employment tax | Often applies broadly (modeled at 15.3%) | Applies to salary (modeled at 15.3%) | Not modeled on dividends; corporate payroll varies |
| Dividend tax | No | No | Yes on distributions (modeled at 15%) |
Important considerations
- Reasonable salary: S‑Corp salary should be defensible based on duties, time, and market pay.
- State rules: some states impose franchise taxes or special entity fees not modeled here.
- High-income add-ons: additional Medicare tax and NIIT can change outcomes; not modeled.
- QBI/199A: can reduce pass-through income tax for some taxpayers; not modeled.
- Cash vs value: retained C‑Corp earnings may increase company value but do not equal owner cash in the year retained.
- Use cases: many owners use this calculator to decide whether an S‑Corp election is worth the added compliance cost, or to understand how much C‑Corp retention changes the picture.
Practical workflow for comparing scenarios
To get the most value from the calculator, run it like a mini sensitivity analysis. First, enter your best estimate of annual revenue and expenses. Second, test two or three S‑Corp salary levels (for example, a conservative salary, a market salary, and a higher salary). Third, test two C‑Corp distribution levels (for example, 100% distribution vs. 50% distribution). Keep notes on the inputs you used so you can reproduce the results later.
Finally, remember that the “best” structure is not always the one with the lowest modeled tax. Administrative burden, payroll processing, retirement plan options, investor expectations, and legal considerations can matter just as much. This page focuses on the tax side so you can have a clearer conversation with your accountant or advisor.