Entity Selection Guide
Disregarded Entity vs. S-Corp vs. Partnership vs. C-Corp: How Each Is Taxed
Four federal tax classifications, one confusing choice. Here is how a disregarded entity, a partnership, an S-corporation, and a C-corporation are each taxed in 2026, the returns they file, and how the same profit produces very different tax bills depending on which box you land in.
A software developer files LLC paperwork with her state, and a week later her accountant asks a question she was not expecting. How do you want the LLC taxed? She thought forming the LLC was the tax decision. It was not. The state handed her a legal entity. The IRS still needs to know which of four federal tax treatments applies, and that second choice is the one that actually moves her tax bill. The scenarios in this article are theoretical, not real clients, but the rules are exactly the ones I apply every filing season.
An LLC is a legal entity, not a tax status
An LLC is a state-law legal entity, not a federal tax status. The IRS taxes it under the check-the-box rules in Treasury Regulation section 301.7701-3. By default a single-member LLC is a disregarded entity and a multi-member LLC is a partnership. The same LLC can instead elect to be taxed as a corporation by filing Form 8832, and it can then elect S status with Form 2553. So one LLC can land in any of the four federal buckets. A business formed as a corporation under state law starts as a C-corp and elects S status the same way. The legal wrapper and the tax classification are two separate decisions, and people conflate them constantly.
Disregarded entity
A disregarded entity is a single-member LLC that has made no corporate election, so for federal tax purposes it is not treated as separate from its owner. The owner reports the business on Schedule C, E, or F of their Form 1040 and pays self-employment tax under IRC section 1401 at 15.3% on 92.35% of net earnings, capped at the $184,500 Social Security wage base for 2026 with the 2.9% Medicare piece uncapped. There is no separate business return. It is the simplest of the four and the default for most solo owners. The owner still claims the up-to-20% qualified business income deduction under IRC section 199A.
Partnership
Two or more members with no corporate election default to a partnership. It files Form 1065 and issues each partner a Schedule K-1. The partnership itself pays no federal income tax. The profit flows through to the partners, who report it on their own returns. A general partner pays self-employment tax on the full distributive share under IRC section 1402(a). A limited partner generally excludes the distributive share except for guaranteed payments, under section 1402(a)(13), though the IRS has been challenging aggressive use of that exclusion by owners who actively run the business. Partners get the section 199A deduction too.
S-corporation
An S-corp is an LLC or a corporation that has filed Form 2553. It files Form 1120-S, issues K-1s, and pays no federal income tax at the entity level. The owner must take reasonable compensation as W-2 wages, which carry FICA, and the rest of the profit can come out as distributions that are not subject to FICA or self-employment tax. That distribution carve-out is the entire reason the S-corp saves payroll tax. Section 199A applies, with the wrinkle that a higher salary reduces qualified business income but can raise the W-2 wage limit on the deduction. The tradeoff is eligibility and cost. An S-corp is capped at 100 shareholders, allows only one class of stock, and limits who can own it, all under IRC section 1361, and it adds payroll and a separate return.
C-corporation
A C-corporation is the only truly separate taxpayer of the four. It files Form 1120 and pays a flat 21% federal corporate rate under IRC section 11(b). When the after-tax profit is paid out as a dividend, it is taxed again on the shareholder's return at qualified-dividend rates of 0, 15, or 20% under IRC section 1(h)(11), plus the 3.8% net investment income tax under IRC section 1411 for higher earners. That second layer is the double taxation. A C-corp gets no section 199A deduction. It earns its place when profit is reinvested rather than distributed, when you want to offer certain tax-free fringe benefits, or when you are chasing the qualified small business stock exclusion under IRC section 1202.
The four side by side
Same business, four tax outcomes. This is the structural comparison I sketch on a whiteboard for almost every new business owner before we talk dollars.
Disregarded entity
Single-member LLC, default
Partnership
Multi-member LLC, default
S-corporation
Elected via Form 2553
C-corporation
Default for a corporation
The double-tax math, in dollars
To see why the C-corp box scares off most small owners who plan to take the money home, follow $100,000 of profit through a C-corp that distributes all of it, versus the same $100,000 in any pass-through, looking only at federal income tax on that layer.
C-corp, profit paid out
Pass-through, taxed once
Federal income tax only, on the distributed layer, for a high earner in the 24% bracket. The pass-through side also owes self-employment or payroll tax on the earnings, and a high earner adds the 3.8% net investment income tax to the C-corp dividend. The point is the second layer, not the exact rate.
So which box do you want
If you are a solo owner just starting out, stay a disregarded entity until the numbers justify more. When your net profit climbs into the range where the self-employment tax on distributions would clearly outrun the cost of payroll and an 1120-S, elect S status. If you have partners, you are a partnership by default, and the question becomes whether an S election would cut the self-employment tax on your active share. The C-corp is the outlier. It fits when you are reinvesting profit for growth, raising outside capital, or building toward a section 1202 stock sale, and it is usually the wrong answer for an owner who wants to take the cash home each year.
The honest truth is that the right box depends on your exact profit, your salary, your state, and whether you have other W-2 income eating the Social Security wage base. Run your own numbers with the EntityIQ S-Corp tax calculator before you file anything. For the two-way version of this decision, see S-Corp or LLC, and for the wage math behind reasonable compensation, see our guide on reasonable compensation.
This article is educational and is not legal or tax advice. The figures above are 2026 amounts and the owners are theoretical. Please consult a qualified CPA or Enrolled Agent before choosing or changing your entity's tax classification.