What Are LLC Companies, C Corp, or S Corp? 2026’s No-B.S. Breakdown for California Business Owners
Here’s a $30,000 mistake nearly half of California’s new LLC owners are making: They form an LLC, but have no idea what are LLC companies C Corp or S Corp entities or how the choice will impact their tax bill—and miss tens of thousands in legal savings every year. Get this wrong, and you could pay double taxes, forfeit your QBI deduction, or trigger a costly IRS audit. Done right, the right entity choice is a weapon to slash tax, shield assets, and set up generational wealth.
Quick Answer: Defining LLC, S Corp, and C Corp in 2026
LLC (Limited Liability Company): A legal entity structured to provide liability protection to its owners (“members”), with the flexibility to be taxed as a sole proprietorship, partnership, S Corp, or C Corp. S Corp: Not an entity, but a tax election that allows pass-through taxation, avoiding double tax. C Corp: A traditional corporation with a separate tax return (Form 1120), subject to corporate-level income tax before profits are taxed again if distributed as dividends. The choice determines how you pay Uncle Sam—and how much you keep in your pocket.
Most owners asking “what are llc companies c corp or s corp” are mixing legal structure with tax classification. An LLC is formed under state law (asset protection), but for federal tax purposes the IRS classifies it by default under “check-the-box” rules (Treas. Reg. §301.7701-3). That means your LLC can file as a sole prop (Schedule C), partnership (Form 1065), S Corp (Form 1120-S), or C Corp (Form 1120). The paperwork you file with the IRS—not the name on your Articles—determines how you’re taxed.
Why This Decision Still Creates $20,000 Differences in Tax Bills—Even Now
The difference between LLC, C Corp, and S Corp status remains the most misunderstood driver of business owner tax liability in California for 2026. If you earn $150,000 in net profit as a consultant or agency owner and miss the right election, you could pay $18,770 in avoidable self-employment taxes or get caught by California’s $800 annual franchise minimum. Here’s how:
- LLCs: By default, single-member LLCs are taxed as sole proprietors (Schedule C); multi-members as partnerships. But you may elect S Corp or C Corp status for different tax results. Most owners do not realize an LLC can “become” an S Corp for IRS purposes by filing Form 2553.
- C Corps: Always pay a 21% federal tax on company net profits, then shareholders personally pay on any dividends. Double taxation matters if you’re extracting profits, but could mean extra savings for reinvesters with large benefit packages or R&D credits.
- S Corps: Offer pass-through profits—no federal or California-level corporate tax, but you must pay yourself a “reasonable salary” (subject to payroll taxes). The S Corp election can reduce self-employment taxes by $6,800–$21,000 annually for many high-earning 1099s, consultants, or agency owners.
To see side-by-side tax outcomes under these models—and how quickly the wrong status costs real money—plug your profit numbers into this small business tax calculator.
The Owner’s Guide to Choosing—LLC, C Corp, or S Corp?
Let’s walk through this in the context of a real scenario. Jess, a California-based design agency owner, expects $220,000 in profit for 2026. If she stays LLC default (Schedule C), she’ll owe about $31,130 in federal/self-employment tax. If she elects C Corp, the flat 21% federal on the first $220K equals $46,200 owed by the business—plus tax again on any dividends she takes out. If she elects S Corp (and pays herself a market $80,000 salary through payroll), $80k will be subject to payroll and income tax, but the other $140k bypasses self-employment tax—generating $15,925 in savings.
Mandatory Link Placement: Persona and Service Pages
This is not a one-size-fits-all decision. There are specific rules for business owners, independent contractors, and investors by structure. Owners often need a formal entity formation review to execute or correct the right election—failing to do so is one of the top triggers for IRS and FTB penalties in California.
For a full strategies breakdown, see our Complete S Corp Tax Guide.
KDA Case Study: Solopreneur Turns LLC Into S Corp—and Saves $12,380
A recent KDA client, Michael, ran a SaaS consulting business as a single-member LLC. His net profit for 2025 hit $190,000, but he was losing $14,535 to federal self-employment tax on top of income tax. We analyzed his workflow, set up the S Corp election via IRS Form 2553, and implemented payroll for $85,000 (his market value). Michael’s W-2 covered Social Security and Medicare on the $85k, but the remaining $105k’s profit now bypassed self-employment tax. His savings in just the first year hit $12,380 compared to staying LLC-default. Michael paid $3,200 in KDA advisory fees—a 3.87x ROI in year one.
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.
Pros, Cons, and IRS Myths for Every Structure
| Entity Type | Taxation | Who Should Use | Red Flags |
|---|---|---|---|
| LLC | Flexible (default pass-through or elect S/C Corp) | Startups, consultants, real estate | State fees, FTB penalties for missed statements |
| S Corp | Pass-through; salary required | 1099s, agency owners, multi-LLC | Reasonable salary risk, payroll setup |
| C Corp | Double tax—entity + dividends | Tech, VC, high-margin, reinvesters | Double tax risk, complex compliance |
Why Most Owners Get It Wrong
Roughly 62% of “LLC” businesses in California never file the S Corp election form (IRS 2553), missing out on major tax breaks. Meanwhile, new laws in 2026 are pushing more active owners to S Corps, while some VC-funded tech startups still require C Corp setups for equity financing.
- LLC is a legal wrapper—not a tax structure. Its tax treatment depends on what you elect.
- You cannot “convert” an LLC to S Corp overnight—if you miss the January 1 election deadline, IRS may only allow next-year status.
- California imposes an $800 minimum franchise tax annually on both LLCs and corporations—plan for it regardless.
Key Takeaway: Your “LLC” is not a tax strategy by itself. How you elect to have it taxed determines your savings, audit profile, and future investment opportunities.
Red Flags and Mistakes: Misfiled Elections, Audit Triggers, and IRS Rule Changes
For 2026, new IRS enforcement is zeroing in on “improper S Corp elections” and LLCs failing to file the right forms. If you make an S Corp election, but your ownership does not meet requirements (must be U.S. individuals or approved trusts, max 100 shareholders, only one class of stock), your S Corp status can be revoked retroactively—meaning you absorb all back taxes at C Corp rates plus penalties (see IRS S Corp eligibility details).
Common Mistake: Owners treat S Corp elections as a “set-and-forget” step—then miss the California Statement of Information (Form SI-200) filing, or fail to run payroll, generating $2,000–$12,000 in penalties in an audit.
If you missed the S Corp election window, there are late relief procedures (see IRS Revenue Procedure 2013-30), but it’s complicated—structured reviews prevent risk of losing eligibility. For C Corps, double taxation can devastate after-tax profits unless you’re reinvesting most earnings.
How to Implement or Change Your Entity Type (Step-by-Step for 2026)
- Review your goals: Are you seeking outside investment, asset protection, or pure tax savings?
- Create or amend your LLC/C Corp: File Articles of Organization/Incorporation with the California Secretary of State. Use an attorney for complex situations.
- Apply for your EIN: Every business needs a federal Employer Identification Number from the IRS (get at IRS EIN Online).
- Elect S Corp status if desired: File IRS Form 2553 by March 15 of the first year you want S Corp treatment.
- Set up payroll if S Corp: Pay yourself a “reasonable salary” per IRS criteria; run via payroll service and pay federal/state payroll taxes.
- Stay compliant annually: File California Franchise Tax Board forms (Form 568 for LLCs, Form 100 for C/C Corps, and SI-200 as required).
California Nuances and QBI Deduction
Remember: While the S Corp/QBI deduction (IRC Section 199A) lets business owners take up to 20% off qualified pass-through income, California does not conform to this federal benefit. Startups with high profits must plan for a bigger CA tax bill—another reason entity choice matters locally.
Frequently Asked Questions
Can an LLC be both an S Corp and a C Corp?
An LLC cannot be both at once—but with the right election, it can be taxed as either. Default is sole prop/partnership; make a tax status election (IRS Form 2553 for S Corp, 8832 for C Corp) to change it. Only one election applies at a time. Carefully consider your exit strategy and future income plans before changing.
Can I run payroll for myself as an LLC?
Not unless you’ve elected S Corp or C Corp status. “Pure” LLCs (taxed as sole props/partnerships) should not pay the owner formal payroll; owners are paid via profit distributions, not W-2. Once you elect S Corp status, you must run W-2 payroll for yourself as the owner-employee.
When does S Corp status save the most?
When profits exceed about $60,000 after reasonable expenses, and you’re ready to run payroll and keep good books. The savings taper off below this profit mark, and extra compliance costs must be weighed against tax breaks.
Is an S Corp or C Corp better for raising money?
C Corp is usually required if issuing multiple classes of stock, attracting venture capital, or going public. S Corps are best for closely held, single-class stock businesses and legacy family enterprises.
What Now? The Bottom Line for 2026
You don’t need to be a lawyer or CPA to understand that the relationship between LLCs, S Corps, and C Corps is about taxation, compliance obligations, and strategic fit for your goals. The $6,000–$30,000 annual swing in tax bills is real. No generic tip will solve this—get a tailored assessment. If you’re still stuck, or wonder if your entity is costing you, now is the time for a formal strategy review.
This information is current as of 2/13/2026. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later. For authoritative IRS guidance, reference IRS Publication 3402 (Taxation of Limited Liability Companies).
Book Your Entity Review and Tax Strategy Session
If you’re confused about whether your business should be an LLC, S Corp, or C Corp, or suspect you’re leaving thousands on the table, it’s time to act. Book a personalized consultation with our California strategy team and get a complete, compliant action plan tailored to your specific profits, industry, and long-term goals. Click here to book your consultation now.
