S-Corp vs. LLC vs. C-Corp for Trade Contractors: A Side-by-Side Comparison

Entity structure is one of those decisions that most contractors make once—often at the advice of whoever helped them set up the business—and never revisit. That is a mistake that can cost $20,000 to $50,000+ per year in unnecessary taxes. The right structure depends on your revenue level, your profit, your exit timeline, and how you take money out of the business.

The Three Options, Explained

Single-Member LLC (Default Tax Treatment)

This is where most contractors start. An LLC provides liability protection and is simple to set up. By default, a single-member LLC is a "disregarded entity" for tax purposes—meaning all income flows directly to your personal return and is subject to self-employment tax (15.3%) on all net earnings up to the Social Security wage base ($168,600 in 2024), plus 2.9% Medicare tax on everything above that.

On $300,000 in net profit, that is roughly $38,000 in self-employment tax alone—before federal and state income taxes. This is the most expensive tax structure for a profitable contractor, and it is the default one.

LLC or Corp with S-Corp Election

An S-Corporation is not a separate entity type—it is a tax election that you make with the IRS (Form 2553). You can be an LLC that elects S-Corp treatment or a corporation that elects S-Corp treatment. Either way, the key benefit is the same: you split your income between a reasonable W-2 salary (subject to payroll taxes) and shareholder distributions (not subject to payroll taxes).

On that same $300,000 in net profit, with a reasonable salary of $120,000, only the salary portion is subject to the 15.3% payroll tax. The remaining $180,000 in distributions avoids approximately $22,000 in self-employment/payroll taxes. That is $22,000 per year, every year, from a single structural change.

The trade-off: S-Corps require payroll processing, reasonable compensation documentation, and slightly more complex tax filings. The annual cost of this additional compliance is typically $3,000–$5,000—a fraction of the tax savings.

C-Corporation

A C-Corp is a separate tax-paying entity. The corporation pays tax on its profits at a flat 21% federal rate, and then shareholders pay tax again when profits are distributed as dividends (the "double taxation" issue). For most trade contractors, this double layer makes C-Corps more expensive than S-Corps.

However, C-Corps have specific advantages in certain situations: they qualify for the Section 1202 Qualified Small Business Stock (QSBS) exclusion, which can eliminate up to $10 million in capital gains tax when you sell. They also allow more flexible benefits planning (the corporation can deduct health insurance, education benefits, and certain fringe benefits that S-Corps cannot).

Side-by-Side Comparison

Factor	LLC (Default)	S-Corp	C-Corp
Self-employment tax on all profit	Yes (15.3%)	Only on salary	No (but double taxation)
Pass-through taxation	Yes	Yes	No
Corporate tax rate	N/A (personal rates)	N/A (personal rates)	21% flat federal
Payroll required for owner	No	Yes	Yes
QBI deduction (20%)	Yes	Yes (on distributions)	No
QSBS exclusion ($10M)	No	No	Yes (if qualified)
Ownership restrictions	None	100 shareholders max, US only	None
Tax complexity	Simple	Moderate	Complex
Annual compliance cost	$500–$1,500	$3,000–$5,000	$5,000–$10,000
Best for revenue range	Under $80K profit	$80K–$5M+ profit	Planning $10M+ exit

When Each Structure Makes Sense for Trade Contractors

Stay as a default LLC if:

• Net profit is below $60,000–$80,000 per year (the tax savings from S-Corp do not justify the compliance cost)
• You are just starting out and revenue is uncertain
• You have significant losses that you need to offset against other income

Elect S-Corp if:

• Net profit exceeds $80,000 and you are paying yourself from the business
• You want to split income between salary and distributions to reduce payroll taxes
• You plan to retain some earnings in the business for growth
• You are a trade contractor doing $1M–$15M in revenue (this covers the vast majority of the target range)

Consider C-Corp if:

• You are planning to sell for $5M+ and want to explore QSBS treatment (requires holding stock for 5+ years)
• You intend to raise outside investment from PE or institutional investors
• You want to retain significant earnings in the business at the 21% corporate rate rather than the higher personal rates
• You have a sophisticated tax advisor who can model the long-term implications including exit scenarios

The Most Common Mistake

The most expensive mistake I see is a profitable contractor—doing $3M+ in revenue with $200K+ in net income—still operating as a default LLC and paying self-employment tax on every dollar. The second most common mistake is making the S-Corp election but setting the owner's salary too high, which negates most of the tax benefit. Both are fixable, and both start with the same question: what does a proper S-Corp election analysis look like for your specific situation?

The entity you chose when you started your business was probably right for a startup. The entity you need now—at $3M, $5M, $8M in revenue—is almost certainly different.

The Bottom Line

For the vast majority of trade contractors doing $1M–$15M in revenue, the S-Corp election is the optimal structure. It provides pass-through taxation, the QBI deduction on distributions, and the ability to split income in a way that saves $15,000–$50,000+ per year in payroll taxes. The compliance cost is minimal relative to the savings. If you are still on a default LLC and your profit exceeds $80K, this is the single highest-ROI tax conversation you can have this year.