LLC vs S-Corp vs C-Corp: 7 Myths That Cost Entrepreneurs Real Money

Our setup (and why)

We’re building with a C-corp at the top, owned by two LLCs (one for me, one for my partner). The C-corp can grant non-voting equity to key team members for profit sharing—without handing them control—because corporations can authorize different classes of voting and non-voting stock in their charter. Harvard Law Corporate Governance Forum+1

Why this shape?

• Hiring & equity: C-corps handle multi-class stock and option plans cleanly. Harvard Law Corporate Governance Forum

• Liability layers: The LLCs sit between us and the operating company.

• Governance clarity: Two owners can deadlock—so we hard-coded a tie-breaker (one final decision maker).

Myth 1: “An LLC saves you taxes.”

Reality: An LLC’s default federal taxation is pass-through. A single-member LLC is usually disregarded (taxed like a sole prop). Multi-member defaults to partnership. Either way, profits pass through to owners and are taxed even if you leave the money in the business. There’s no inherent tax discount just for forming an LLC. IRS+2IRS+2

Myth 2: “You can open an S-corp.”

Reality: S-corp is not a type of company—it’s a tax election. You form an LLC or corporation, then file Form 2553 to be taxed under Subchapter S. IRS+1

Myth 3: “You only pay tax on what you take out.”

Reality: In pass-throughs (partnerships, S-corps), owners are taxed on their share of profits, whether or not cash is distributed. That’s why good operating agreements include tax distributions. IRS+2IRS+2

Myth 4: “S-corp distributions aren’t taxed.”

Reality: S-corp distributions generally avoid FICA/self-employment tax, but you still owe income tax on the profits. Also, the IRS requires “reasonable compensation” as W-2 wages before distributions—otherwise they can reclassify your distributions as wages and assess payroll taxes/penalties. IRS+1

Myth 5: “C-corp double taxation is always worse.”

Reality: C-corps pay a 21% federal corporate rate. Officer pay and wages are deductible to the corporation—so salaries reduce corporate taxable income. If you later pay dividends, those may be taxed to shareholders at 0%/15%/20% qualified dividend rates depending on income. For companies reinvesting heavily, paying 21% inside the corporation can be more cash-efficient than flowing everything through and paying top combined income + self-employment taxes now. PwC Tax Summaries+2IRS+2

Myth 6: “Wyoming hides everything—full anonymity, period.”

Reality: Wyoming is privacy-friendly (no state personal or corporate income tax; member/manager names aren’t listed publicly on formation docs), but privacy ≠ invisibility—especially once you operate in other states (foreign registrations, licenses, bank KYC, etc.). Tax Foundation+1

Update on federal BOI rules: As of March 2025, FinCEN announced that domestic U.S. companies are not required to file BOI; foreign reporting companies still face deadlines. Always re-check before you file—this area has been changing. FinCEN.gov

Myth 7: “Equal partners = fair partners.”

Reality: 50/50 sounds fair—until you deadlock. Put a tie-breaker in writing: a final decision maker, an independent director, or a decision domain split. It protects momentum.

When each structure tends to shine

• Baseline liability shield: LLC (simple, flexible ownership; choose your tax status later). IRS

• Owner-operators with consistent profit beyond a reasonable salary: LLC or corp taxed as S-corp to reduce FICA on the distribution portion—document “reasonable comp.” IRS

• Teams, investors, multi-class equity, reinvesting profits: C-corp—clean cap table, stock plans, and the option to retain earnings at 21% until you need to distribute. PwC Tax Summaries

Quick FAQs

• Do C-corps get a deduction for wages? Yes—Form 1120 shows Compensation of officers and Salaries & wages as deductible lines (subject to limits). IRS

• Are dividends always taxed at lower rates? Only if they’re qualified dividends meeting IRS rules; otherwise they’re ordinary. IRS

• Can I grant non-voting shares to contributors? Yes—if your charter authorizes them and state law allows (Delaware clearly does). Harvard Law Corporate Governance Forum+1

How we’re doing it (template you can copy)

• Topco: C-corp (operations, hiring, equity).

• Owners: Two personal LLCs hold the voting equity.

• Team: Non-voting profit shares for key contributors.

• Governance: Final say vested in one partner to break ties; major decisions enumerated.

Document it. Respect the entity boundary. Feed the business like it’s a separate person—because legally, it is.