Difference Between S Corp and C Corp for LLC: The $18,000 Decision California Owners Can’t Ignore in 2025

Most LLC owners mistakenly believe their legal entity structure covers both compliance and tax efficiency. In reality, the difference between S Corp and C Corp tax status is the line between a $18,000 IRS bill and a much lower liability – especially for entrepreneurs and growing service businesses in California. Choosing wrong adds layers of double taxation, FTB penalties, or missed payroll tax breaks that most accountants don’t flag until it’s too late.

Difference Between S Corp and C Corp for LLC: For a limited liability company (LLC), electing S Corp or C Corp status for tax purposes means deciding how the IRS and California Franchise Tax Board will tax your profits, owner compensation, and business operations in 2025. For most small service businesses, S Corp status provides flow-through treatment and often reduces self-employment taxes, while C Corp status could mean double taxation but allows for fringe benefits and reinvested profits.

Quick Answer: LLC Tax Status Choices in 2025

If you own an active LLC, you aren’t locked into default tax treatment. You can choose to be taxed as a sole proprietorship (if single-member), partnership (if multi-member), S Corp, or C Corp. Electing S Corp is often better for owner-operators wanting to save on self-employment taxes and pay themselves a reasonable salary. C Corp status is better for owners planning to attract VC funding, offer fringe benefits, or keep profits inside the company long-term.

This sets the stage for specific strategies every California LLC owner, W-2 entrepreneur, or investor needs to evaluate – because the wrong choice means you donate extra taxes to the IRS and FTB.

The S Corp Advantage: How LLCs Save on Employment Taxes in 2025

S Corp election transforms how your LLC profits are taxed. Instead of paying self-employment tax (Social Security and Medicare) on every dollar, LLC owners who switch to S Corp tax status can split income between a reasonable W-2 salary and profit distributions. Only salary is subject to payroll taxes; distributions are not. Here’s how it breaks down with real KDA client numbers:

• LLC owner “Jessica” earns $180,000 in revenue from her marketing agency.
• Without S Corp election, she pays self-employment tax on all $120,000 of her profit (after expenses) – over $18,360 in payroll taxes.
• With S Corp, she pays herself a $70,000 salary (subject to approx. $5,355 in payroll tax), and takes $50,000 in distributions, which are NOT subject to Social Security/Medicare withholdings.
• S Corp election saves Jessica $7,675 every single year.

According to IRS S Corporation guidance, you must pay a “reasonable” salary—drawing too little triggers audits, but distributions above salary mean major annual tax saving potential.

Who Should Use S Corp Election?

• Solo LLCs (single-member) earning $50,000+ in profit
• Service businesses where owners actively work (consulting, marketing, trade, etc.)
• Owners who want to reduce self-employment taxes, pay themselves via payroll, and avoid double taxation

Pro Tip

For California LLCs, you still pay the $800 Franchise Tax Board (FTB) minimum fee, regardless of S Corp or C Corp status. But S Corp status almost always reduces total taxes for owner-operators in the $75,000–$500,000 profit range.

KDA Case Study: LLC Consultant Cuts Taxes by 41% with S Corp Switch

María, a Los Angeles-based self-employed IT consultant, operated as a single-member LLC. In 2024, her net profit was $162,000. Before working with KDA, she was paying over $24,000 in self-employment taxes alone.

KDA analyzed María’s books and recommended an S Corp election retroactive to January. She shifted $72,000 to salary (with proper payroll), leaving $90,000 as S Corp distributions exempt from Social Security and Medicare tax. This single change brought María’s SE tax bill down to $11,016 – a savings of $12,984 in the first year. For $3,000 in tax planning fees, she realized a 4.3x immediate ROI, plus annual compliance and payroll automation to simplify her admin work going forward.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

C Corp Status: When an LLC Should Consider It Anyway

Despite the S Corp tax advantages, there are scenarios where C Corp status actually wins for LLCs—especially in California’s tech, e-commerce, and real estate sectors. Here’s why:

• C Corps allow for greater retention of profits, meaning income left in the business is taxed at the federal flat rate (21% in 2025), and can be reinvested or used for bigger employee benefit plans.
• LLCs taxed as C Corps can offer health insurance, 401(k) matches, and other pre-tax fringe benefits that aren’t as flexible under S Corps. This is major for those building teams or seeking outside investment.
• Non-resident and institutional investors often prefer C Corp structures due to simpler stock rules and ease of raising capital.

However, any C Corp LLC faces double taxation: first when the LLC’s profits are taxed, then again when dividends are paid to owners. This is usually NOT efficient for owner-only or family LLCs, but may pay off for businesses reinvesting earnings or positioning for acquisition.

Consider “GreenLife LLC,” a multi-member firm with $650,000 profits but plans to reinvest all earnings for five years. With a C Corp election, the profit is taxed at 21% federally, but owners avoid immediate double taxation until they take dividends years later. KDA clients in tech and real estate sometimes leverage this—just beware of the state FTB overlay and timing of distributions.

Pro Tip for Tech & REI

C Corp LLC status can be a tool when building a business to sell, or when planning VC/angel rounds. It’s nearly never optimal if you just want to take home profits each year. For deep dives, our comprehensive S Corp tax guide explains additional hybrid strategies.

Biggest Mistake: Neglecting the S Corp/C Corp Election Deadline

Most LLC owners miss the window to elect S Corp or C Corp tax status altogether. Worse, they let their accountant default to partnership or sole proprietorship rules (called “disregarded entity” for tax purposes), handing thousands to the IRS every year.

Red Flag: If you have an LLC and have never filed IRS Form 2553 (for S Corp) or Form 8832 (for C Corp), you’re likely using the default, and almost certainly overpaying taxes if you earn over $60,000 in profits as an owner-operator.

• Solution: You can file a late election and request IRS relief in many cases. KDA has rescued dozens of clients with late S Corp or C Corp elections, often retroactive to January of the current or prior year (see IRS Form 2553 guidance for S Corps, IRS Form 8832 guidance for C Corps).

Will This Trigger an Audit?

No. Electing S Corp or C Corp status does not trigger an audit by itself. The “audit risk” comes from paying yourself an unreasonably low salary as an S Corp, mishandling payroll compliance, or misreporting distributions as “other income.” Work with a strategist to set proper salary levels and payroll filings.

What If I Own Multiple LLCs?

If you own several LLCs, each can independently choose its tax status. You might run a consulting LLC as an S Corp (to minimize employment tax) and a real estate LLC as a C Corp (for long-term profit retention) – but you need to coordinate payroll, benefits, and compliance reporting carefully. Most “serial entrepreneur” KDA clients use a mix, with entity holding structures for further savings.

FAQ: More Questions on S Corp and C Corp for LLCs

What’s a reasonable salary for S Corp owners?

The IRS doesn’t define an exact amount, but your salary should reflect what you’d pay someone else to perform your role (market rates, city, and industry considered). Document this with salary surveys or quotes. Skimping below $45,000–$60,000 for complex roles is a red flag for six-figure LLCs.

What forms do I file to elect S Corp or C Corp status?

S Corp: IRS Form 2553, generally by March 15 for existing LLCs (or within 75 days of forming). C Corp: IRS Form 8832. In both cases, you’ll want a tax advisor to prepare and submit the forms, with supporting documentation if requesting late election relief.

Can an S Corp or C Corp save me money on California state taxes?

Not directly. The state generally taxes LLCs via the $800 minimum franchise fee and the gross receipts fee above $250,000. S Corps, however, pay a separate 1.5% California state tax, but this is usually offset by federal employment tax savings. C Corps pay 8.84% CA tax rate on net income.

What About Real Estate Investors?

If your LLC holds only passive real estate (rental income), S Corp election is almost never recommended. Rental income isn’t subject to self-employment tax by default, so the “salary/distribution split” benefit disappears. S Corp is for active businesses—consulting, services, trades—not landlords. For California real estate pros, focus on depreciation and cost segregation strategies instead.

KDA Case Study: Serial LLC Owner Uses Mixed Entities for Tax Bracket Play

Eric is a multi-LLC owner: he runs an $850K consulting shop in San Diego and owns real estate in Sacramento. KDA mapped out an entity strategy:

• His consulting LLC elected S Corp, dropping his SE tax by $14,900 in the first year. KDA set up an accountable plan for fringe deductions, payroll, and benefits.
• His real estate LLC remained a partnership (no S Corp election), optimizing depreciation and avoiding an extra 1.5% corporate tax layer.
• Result: $18,700 tax savings first year; $5,800 ongoing. Total planning fee: $4,500. ROI: 5.1x—plus higher asset protection and smoother compliance.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

Red Flag Alert: Payroll Setup Traps for S Corp LLCs

If you make an S Corp election for your LLC, you MUST run payroll for owner-employees—even if it’s just you. This means issuing W-2s, filing payroll tax forms, and making quarterly payments. Many get tripped up trying to “do it themselves,” leading to IRS penalties or state labor notices.

• Never pay yourself only via owner draws or personal checks after S Corp election.
• Set up professional payroll software or outsource to a bookkeeping team with S Corp expertise.
• Keep clear books. Your S Corp LLC must have its own bank account and accounting records—never commingle with personal funds.

For hands-off payroll and bulletproof compliance, see our bookkeeping and payroll service options.

How to Choose: S Corp or C Corp for Your LLC in 2025?

There’s no “one size fits all.” Consult these decision rules:

• S Corp status usually saves the most for active service business owners earning $60,000–$500,000+ annually who want to take profits home each year.
• C Corp status serves best for those raising capital, reinvesting profits, or offering Cadillac health and retirement benefits to teams.
• Real estate and passive income LLCs generally skip both in favor of default pass-through treatment.
• Always revisit your choice before year-end, especially if your business changes or California alters its FTB or payroll rules for LLCs.

For a complete breakdown of S Corp strategies, see our S Corp tax guide for California.

This information is current as of 10/21/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

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