LLC, S-Corp, or C-Corp: What Saves You the Most in 2025?

Introduction

Small business owners face a critical decision when choosing an entity structure, as the wrong choice can lead to excessive taxes, compliance burdens, or missed deductions, stifling growth and profitability. Inexperienced advisors often recommend generic structures without considering industry-specific needs or the latest tax incentives, costing owners thousands. With the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, enhancing deductions like QBI and bonus depreciation, are you confident your business structure maximizes savings for 2025?

At Kewal Krishan & Co, our expert tax advisors help clients save an average of $50,000 annually, potentially totaling $1 million over a decade through optimized entity selection. This blog compares LLCs, S-Corps, and C-Corps for 2025, leveraging Internal Revenue Code (IRC) provisions, with detailed examples and compliance steps to guide your decision. Whether prioritizing flexibility, self-employment tax savings, or corporate benefits, these insights will help you choose the structure that saves the most. Start refining your approach with guidance from Our Tax Planning Services.

Comparing LLC, S-Corp, and C-Corp: Tax Implications for 2025

Each entity offers distinct tax treatments, influenced by OBBBA’s permanent Qualified Business Income (QBI) deduction under IRC § 199A and 100% bonus depreciation under IRC § 168(k).

LLC Overview

• Taxation: Pass-through entity; income reported on owners’ Form 1040 (sole proprietor, Schedule C) or Form 1065 (partnership, Schedule K-1). All income subject to self-employment (SE) tax (15.3%) under IRC § 1402, half deductible (IRC § 164(f)).
• QBI Deduction: Up to 20% of qualified income, limited for Specified Service Trades or Businesses (SSTBs) above $75,000 single/$150,000 joint, phasing out at $275,000/$550,000 (IRC § 199A).
• Advantages: Flexible ownership, no shareholder limits, ideal for international owners or variable profit splits.
• Drawbacks: Full SE tax exposure; administrative simplicity but no payroll structure.

S-Corp Overview

• Taxation: Pass-through via Form 1120-S, K-1s to shareholders. Owners as employees pay reasonable salaries (FICA/Medicare taxed under IRC § 3121), while distributions avoid SE tax.
• QBI Deduction: Same as LLC, but wage limitation (50% W-2 wages) benefits payroll-heavy firms.
• Advantages: SE tax savings on distributions; audit-defensible payroll structure.
• Drawbacks: Limited to 100 U.S. citizen/resident shareholders; reasonable salary scrutiny.

C-Corp Overview

• Taxation: Entity-level tax at 21% under IRC § 11, reported on Form 1120. Dividends to shareholders taxed again (double taxation) at 0%-20% plus 3.8% NIIT (IRC § 1(h), § 1411).
• QBI Deduction: Ineligible; owners may claim on separate pass-through income.
• Advantages: Retains earnings at lower rate; benefits from 100% bonus depreciation; no shareholder limits.
• Drawbacks: Double taxation unless retained; complex compliance.

For details, see IRS Publication 542.

2025 Tax Advantages and Considerations

LLC

• Best For: Small businesses, startups, or SSTBs below QBI thresholds; international owners.
• OBBBA Benefit: Permanent QBI with expanded thresholds eases SSTB phase-outs.

S-Corp

• Best For: Businesses with significant profits seeking SE tax savings; payroll-heavy operations.
• OBBBA Benefit: QBI permanence and wage-based deductions favor higher salaries.

C-Corp

• Best For: High-growth firms retaining earnings or seeking investor appeal.
• BBBA Benefit: 100% bonus depreciation maximizes deductions for capital-intensive businesses.
  File your tax returns

Detailed Example: Comparing Tax Outcomes

Consider a consulting business (SSTB) with $500,000 net income in 2025, owned by one individual filing jointly with $600,000 total taxable income.

LLC Scenario

• Tax: $500,000 subject to SE tax ($76,500, half deductible) and 32% income tax after QBI. QBI: 20% of $500,000 = $100,000, reduced to ~$25,000 due to SSTB phase-out (75% at $550,000). Taxable income: $475,000 – $38,250 (SE deduction) = $436,750. Tax: ~$139,760 + $76,500 = $216,260.
• Net: High SE tax burden.

S-Corp Scenario

• Tax: Salary $150,000 (payroll tax $22,950), distribution $350,000 (no SE tax). QBI: $100,000, limited to 50% wages ($75,000), phased to ~$18,750. Taxable: $431,250. Tax: ~$138,000 + $22,950 = $160,950.
• Net: Saves $55,310 vs. LLC due to SE tax avoidance.

C-Corp Scenario

• Tax: $500,000 taxed at 21% ($105,000). Dividends ($395,000) at 20% + 3.8% NIIT = $93,860. Total: $198,860.
• Net: Saves vs. LLC but less than S-Corp unless earnings retained.

S-Corp optimal for moderate-income SSTBs; C-Corp suits retention-focused firms.

Alternative Scenario

For $200,000 income (below $150,000 threshold): LLC/S-Corp yield full $40,000 QBI ($12,800 savings at 32%); S-Corp saves ~$15,300 SE tax on $100,000 distribution. C-Corp pays $42,000 entity tax, less competitive unless reinvesting.

Step-by-Step Guide for Taxpayer Compliance

To choose and maintain the optimal entity for 2025, follow these steps:

1. Evaluate Needs: Assess profit levels, growth plans, and owner demographics (U.S. vs. international).
2. Select Entity: File state forms (e.g., LLC Articles, S-Corp Form 2553 by March 15, 2025).
3. Set Compensation (S-Corp): Determine reasonable salary using industry data (e.g., BLS for comparable roles).
4. Calculate QBI: For LLC/S-Corp, compute qualified income and apply phase-outs (IRC § 199A).
5. File Returns: LLC (Form 1065), S-Corp (Form 1120-S), or C-Corp (Form 1120) by March/April 2026; personal Form 1040 with Form 8995-A for QBI.
6. Pay Taxes: Remit payroll (Form 941) or estimated taxes (Form 1120-W/1040-ES).
7. Retain Records: Keep formation documents, payroll, and calculations for three years (IRC § 6001).

For complex structures, explore Our Business Tax Services.

Common Pitfalls to Avoid

• Unreasonable Salaries (S-Corp): Low salaries risk IRS reclassification, penalties (IRC § 6662).
• QBI Errors: Misapply SSTB phase-outs or exclude non-qualified income (IRC § 199A).
• Double Taxation (C-Corp): Distributing all earnings negates lower rate advantage.
• Late Elections: Miss Form 2553 deadline, defaulting to C-Corp or partnership.

Why Work with a Tax Expert?

Choosing between LLC, S-Corp, or C-Corp in 2025 requires balancing QBI benefits, SE tax savings, and OBBBA enhancements, where errors can lead to audits or overpayments. Generic advisors may misjudge salary requirements or state conformity, costing thousands. Kewal Krishan & Co delivers customized entity analyses under IRC provisions, ensuring optimal tax outcomes and compliance. Our expertise mitigates risks, as shown in Our Tax Litigation Services.

Conclusion

In 2025, selecting between LLC, S-Corp, or C-Corp hinges on income levels, ownership structure, and growth goals, with S-Corps often saving most for moderate-income SSTBs via SE tax avoidance and QBI. LLCs suit flexibility, while C-Corps favor retention. OBBBA’s provisions amplify these choices—act now to align your structure with maximum tax efficiency.

Call to Action

Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to choose the best entity structure.

About Our CPA

Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.

Disclaimer

This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.

FAQs

1. Which entity saves most taxes?

S-Corp for SE tax savings; C-Corp for retention; LLC for flexibility (IRC § 199A).

2. Is QBI available for C-Corps?

No, only pass-through entities qualify (IRC § 199A).

3. What’s the 2025 S-Corp election deadline?

Form 2553 by March 15 for new entities.

4. How does OBBBA help?

Permanent QBI and 100% bonus depreciation enhance savings.

5. What records are needed?

Formation, payroll, and income data for three years (IRC § 6001).