Entity Structure Comparison
A high-level educational comparison of how common business structures and tax classifications differ. This is not a tax-savings calculator.
General educational comparison — not tax-year-specific
An important distinction: an LLC is a state-law entity, not a federal tax classification. A single-member LLC may be taxed as a disregarded entity (Schedule C), or it may elect S-corporation or C-corporation tax treatment. "LLC vs. S-Corp" is not a comparison between mutually exclusive legal entity types.
| Comparison | Sole Proprietorship | Single-Member LLC (default) | S-Corporation Election | C-Corporation |
|---|---|---|---|---|
| Legal Entity Type | No separate legal entity | State-law LLC entity | LLC or corporation electing S-corp tax status | State-law corporation |
| Federal Tax Classification | Schedule C (pass-through) | Disregarded entity — Schedule C (pass-through) by default | Pass-through via Form 1120-S and K-1 | Separate taxable entity — Form 1120 |
| Pass-Through Taxation | Yes — income flows to personal return | Yes — default treatment passes income to personal return | Yes — income passes through to owners' personal returns | No — taxed at corporate level; dividends taxed separately |
| Self-Employment / Payroll Tax | Self-employment tax applies to net profit | Self-employment tax generally applies to net profit | Owner-employee wages subject to payroll tax; remaining profit may avoid SE tax | Officers/employees receive W-2 wages subject to payroll tax |
| Reasonable Compensation | Not applicable | Not applicable under default classification | Owner-employees must receive reasonable compensation before distributions | Reasonable compensation standards apply to officer-employees |
| Separate Tax Return | No — reported on individual return | No — reported on individual return under default treatment | Yes — Form 1120-S filed separately | Yes — Form 1120 |
| Administrative Complexity | Lowest administrative complexity | Moderate — state filing requirements and compliance obligations | Higher — payroll, reasonable compensation analysis, separate return | Highest — separate corporate return, potential double taxation |
| Liability Considerations (general) | No liability separation between owner and business | General liability separation under state law (subject to exceptions) | Depends on underlying entity and state law | Corporate liability separation under state law (subject to exceptions) |
Sole Proprietorship
- Legal Entity Type
- No separate legal entity
- Federal Tax Classification
- Schedule C (pass-through)
- Pass-Through Taxation
- Yes — income flows to personal return
- Self-Employment / Payroll Tax
- Self-employment tax applies to net profit
- Reasonable Compensation
- Not applicable
- Separate Tax Return
- No — reported on individual return
- Administrative Complexity
- Lowest administrative complexity
- Liability Considerations (general)
- No liability separation between owner and business
Single-Member LLC (default)
- Legal Entity Type
- State-law LLC entity
- Federal Tax Classification
- Disregarded entity — Schedule C (pass-through) by default
- Pass-Through Taxation
- Yes — default treatment passes income to personal return
- Self-Employment / Payroll Tax
- Self-employment tax generally applies to net profit
- Reasonable Compensation
- Not applicable under default classification
- Separate Tax Return
- No — reported on individual return under default treatment
- Administrative Complexity
- Moderate — state filing requirements and compliance obligations
- Liability Considerations (general)
- General liability separation under state law (subject to exceptions)
S-Corporation Election
- Legal Entity Type
- LLC or corporation electing S-corp tax status
- Federal Tax Classification
- Pass-through via Form 1120-S and K-1
- Pass-Through Taxation
- Yes — income passes through to owners' personal returns
- Self-Employment / Payroll Tax
- Owner-employee wages subject to payroll tax; remaining profit may avoid SE tax
- Reasonable Compensation
- Owner-employees must receive reasonable compensation before distributions
- Separate Tax Return
- Yes — Form 1120-S filed separately
- Administrative Complexity
- Higher — payroll, reasonable compensation analysis, separate return
- Liability Considerations (general)
- Depends on underlying entity and state law
C-Corporation
- Legal Entity Type
- State-law corporation
- Federal Tax Classification
- Separate taxable entity — Form 1120
- Pass-Through Taxation
- No — taxed at corporate level; dividends taxed separately
- Self-Employment / Payroll Tax
- Officers/employees receive W-2 wages subject to payroll tax
- Reasonable Compensation
- Reasonable compensation standards apply to officer-employees
- Separate Tax Return
- Yes — Form 1120
- Administrative Complexity
- Highest — separate corporate return, potential double taxation
- Liability Considerations (general)
- Corporate liability separation under state law (subject to exceptions)
Pass-through taxation means business income is reported on the owners' personal tax returns rather than being taxed at a separate entity level. Self-employment and payroll tax concepts, reasonable compensation requirements, separate-return obligations, and administrative complexity all factor into entity selection.
Where legal formation, liability protection, or state-level differences are involved, legal counsel may be appropriate. Structural Accountability does not provide legal entity-formation advice. Any hypothetical salary percentage used for educational illustration would be clearly identified as illustrative — not a reasonable-compensation determination.
This comparison is for general educational purposes only and does not constitute legal or tax advice. Entity classification and election involve legal, tax, and operational considerations that vary by jurisdiction and circumstance.
Your actual tax position may differ based on income sources, deductions, credits, entity structure, prior-year tax, withholding, and other circumstances. Professional review may be appropriate before making tax or structural decisions.
Explore Advisory →