Choosing the Right Business Entity: LLC vs. S-Corp vs. C-Corp in 2026

Choosing the right business entity has always been one of the most important decisions an entrepreneur makes. It affects how much you pay in taxes, how much personal liability you carry, how you raise capital, and how you eventually exit the business. With the One Big Beautiful Bill Act, (OBBBA) signed into law on July 4, 2025, the landscape has shifted again, and this time, many of the rules that business owners spent years treating as temporary are now permanent.

The OBBBA made permanent the individual tax rates and the Section 199A qualified business income deduction that were originally introduced under the 2017 Tax Cuts and Jobs Act. It also restored 100 percent bonus depreciation and locked in the flat 21 percent corporate tax rate. For business owners who spent the last several years wondering whether these provisions would sunset at the end of 2025, the permanence fundamentally changes the planning calculus. You can now structure your entity with confidence that the rules aren't going to revert in a year or two. That stability matters enormously when you're making decisions that will affect your tax liability for decades.

An LLC taxed as a sole proprietorship or partnership is the simplest structure and the most common starting point for new businesses. The income passes through directly to the owner's personal return, and the now-permanent Section 199A deduction can reduce the effective tax rate on qualified business income by up to 20 percent. For a business owner in the 37 percent bracket, that deduction effectively reduces the rate on QBI to 29.6 percent, a significant benefit that is now permanent rather than scheduled to expire.

But there's a cost. All net earnings from a sole proprietorship are subject to self-employment tax, 12.4 percent for Social Security on the first $176,100 of combined wages and self-employment income, plus 2.9 percent for Medicare on all net earnings, plus an additional 0.9 percent Medicare surtax on earnings above $200,000 for single filers or $250,000 for joint filers. For a profitable business, that self-employment tax bill adds up fast. A sole proprietor earning $250,000 in net profit is paying roughly $30,000 in self-employment tax before income tax even enters the picture.

An S corporation can solve the self-employment tax problem. The mechanics work like this: you form a corporation and elect S status by filing Form 2553. As an S corporation owner-employee, you pay yourself a reasonable salary, which is subject to payroll taxes, the employer and employee sides of Social Security and Medicare. But the remaining corporate profit passes through to you as a distribution that is not subject to self-employment tax. The savings can be substantial.

Here's a practical example. Say your business generates $250,000 in net profit. As a sole proprietor, the entire amount is subject to self-employment tax. As an S corporation, you might pay yourself a salary of $120,000, subject to payroll taxes, and take the remaining $130,000 as a distribution. You just avoided self-employment tax on $130,000, saving you roughly $15,000 to $18,000 per year. The Section 199A deduction still applies to the pass-through portion, so you're stacking both benefits.

But S corporations come with real constraints. You're limited to 100 shareholders, all of whom must be U.S. citizens or resident aliens. You can only have one class of stock, which limits your ability to create preferred equity or different economic arrangements among owners. You have to run payroll, file quarterly payroll tax returns, file a separate corporate tax return on Form 1120-S, and pay yourself that reasonable salary, and the IRS actively scrutinizes S corporation officer compensation. Set the salary too low and you're asking for an audit; the IRS knows exactly what game is being played.

C corporations have become genuinely attractive again, and the OBBBA cemented that attractiveness. The flat 21 percent corporate tax rate is now permanent. One hundred percent bonus depreciation is restored, meaning businesses can immediately expense the full cost of qualifying asset purchases rather than depreciating them over time. For a business that is reinvesting its profits rather than distributing them to owners, the C corporation can be a powerful accumulation vehicle.

Consider a business earning $500,000 in profit. In a C corporation, the federal tax is $105,000, a 21 percent rate. In a pass-through entity with an owner in the top bracket, the federal income tax on that same profit could be as high as $148,000 after the Section 199A deduction, plus self-employment tax if it's not an S corporation. That's a meaningful difference if the money is staying in the business.

The trade-off, of course, is double taxation. When you eventually pull money out of a C corporation as dividends, the shareholders pay tax again at qualified dividend rates, up to 20 percent, plus the 3.8 percent net investment income tax, for a combined rate of 23.8 percent. So money that was taxed at 21 percent on the way in gets taxed at up to 23.8 percent on the way out, for a combined effective rate of roughly 40 percent on distributed profits. If you're planning to distribute all profits currently, the C corporation loses its advantage.

But the OBBBA also made the estate and gift tax exemption permanent at $15 million per person, indexed for inflation. For business owners thinking about long-term succession planning, this interacts with entity selection in a critical way. C corporation stock, and only C corporation stock, can qualify for the Section 1202 qualified small business stock exclusion. Under Section 1202, if you hold QSBS for more than five years, you can exclude up to $15 million in capital gains from federal tax when you sell. That exclusion is not available for S corporation stock, partnership interests, or LLC interests. For a founder planning to build and eventually sell a business, Section 1202 can shelter an enormous amount of gain.

There's no universally right answer, and anyone who tells you otherwise is oversimplifying. The optimal entity depends on your current income level, whether you're taking distributions or reinvesting, how many owners you have, whether you need to raise outside capital, your exit timeline and strategy, whether Section 1202 applies to your business, and how the now-permanent provisions of the OBBBA interact with your specific financial situation. The worst thing you can do is pick an entity based on what your friend chose, what you read in an online forum, or what was right five years ago under different rules. Run the numbers for your specific situation, the stakes are too high and the law has changed too much to guess.