If you're going to open your business in the United States, sooner or later you'll reach the same crossroads: LLC vs. Corporation . And you almost always arrive at it with the question framed incorrectly. Most Hispanic entrepreneurs believe they're choosing between two things of the same type, when in reality they're conflating two distinct decisions: how their company is registered and how their company is taxed . This confusion costs money: some pay thousands of dollars more to the IRS each year, while others create an expensive structure that their business doesn't yet need. Let's clarify this with real numbers.
LLC vs Corporation: The Confusion That Costs Money
Here's the key point that almost no one explains on the first day: an LLC is a legal entity that you register with a state. An S-Corp is not an entity; it's a tax classification assigned by the IRS. They aren't competing categories. Your LLC can choose to be taxed as an S-Corp and still be classified as an LLC by the state.
Therefore, the correct question is not "LLC or S-Corp?", but two separate questions:
- Which legal entity do I register? LLC o Corporation.
- How do I want the IRS to charge me? As pass-through (by default), as S-Corp or as C-Corp.
Once you separate the two decisions, everything else becomes arithmetic.
What is an LLC and what does it actually protect?
The LLC (Limited Liability Company) is the most popular structure among small and medium-sized entrepreneurs, and for good reason: it separates your personal assets from the business, is quick to register, and doesn't require you to have a board of directors or complicated annual minutes.
By default, the IRS treats a sole proprietor LLC as a disregarded entity : the profit goes directly to your personal tax return. There's no corporate tax. Sounds great, until you see the fine print of the self-employment tax.
What an LLC does protect: your personal assets from business debts and lawsuits. What it doesn't protect: nothing, if you commingle accounts. If you pay your home rent from the business account, a judge can pierce the corporate veil, and the protection disappears. If you haven't registered one yet, first review the advantages of an LLC for foreigners and where it's best to register your company.
What is a Corporation (C-Corp and S-Corp)
A corporation is a more formal legal entity: shareholders, board of directors, minutes, annual reports. It exists in two tax forms.
C-Corp
It pays a flat 21% federal tax on its profits. This is the structure used by companies seeking investors, issuing shares, or planning to go public. Its classic drawback is double taxation : the company pays taxes on its profits, and when it distributes dividends to you, you pay them again on your personal tax return.
S-Corp
It's not a legal entity, it's a tax choice (Form 2553). It avoids double taxation and, most importantly, changes how you pay payroll taxes: you set a reasonable salary, and any profit you distribute above that salary isn't subject to self-employment tax. If you're interested in the formal route, here's the complete guide to creating a corporation in the United States.
LLC vs Corporation: Taxes, in real numbers
This is where the money is decided. Three figures to keep in mind:
- 15.3% de self-employment tax. In a default LLC, all Your net income is subject to 12.4% Social Security tax and 2.9% Medicare tax. By 2026, the Social Security component will apply to the first $184,500 of income (a cap announced by the Social Security Administration); Medicare has no cap.
- 21% federal for C-Corp. Fixed rate on the company's profit, according to the IRS (Publication 542)And again when it distributes dividends.
- 20% QBI deduction. Section 199A allows a deduction of up to 20% of the qualifying profit of the business. It became permanent with the law signed in July 2025. It applies to pass-through structures (LLCs and S-Corps). C-Corps are excluded.
Here's an example to illustrate. Imagine $120,000 in net profit:
- As the default LLC: The $120,000 is subject to self-employment tax.
- As an LLC with an S-Corp election: You pay yourself a reasonable salary—let's say $60,000—and only that salary is subject to payroll taxes. The other $60,000 is distributed as profit sharing, without self-employment tax.
The difference in that scenario is measured in thousands of dollars a year. But beware the catch: the salary has to be reasonable . You can't pay yourself $1 and distribute $119,999 to yourself. The IRS cross-references data and flags S-Corps where distributions far exceed the salary. The rule of thumb: pay yourself what you would pay someone else to do your job.
When is each structure appropriate: 3 scenarios
Scenario 1: You earn less than $50,000 net
Stick with the default LLC. Choosing an S-Corp requires you to run payroll and file Form 1120-S, which costs between $1,500 and $3,000 a year in accounting. Even with that profit, the tax savings still don't cover the administrative costs.
Scenario 2: You earn between $75,000 and $80,000 or more, on a stable basis.
This is where accountants identify the tipping point: the S-Corp choice starts to generate more savings than it costs to maintain. The key word is stability : if you had a single good year, don't restructure your entire portfolio for a sudden spike.
Scenario 3: You are looking for investors or partners with shares
C-Corp, almost without question. Investment funds don't go into LLCs. If your business plan involves raising serious capital, a C-Corp (typically in Delaware) is the expected path.
How to change your business structure smoothly with the IRS
Good news: You're not tied to your initial decision. If you started as an LLC and your business grew, you don't have to dissolve anything. You file Form 2553 with the IRS to elect to be taxed as an S-Corp, and your LLC remains legally recognized by the state.
The three steps you can't skip:
- Run the numbers with your counter first. Payroll, 1120-S and separate account statements are not optional after the election.
- Respect the deadlines. The election has deadlines; submitting it late leaves you with the savings for the following year.
- Document the reasonable salary. Record how you arrived at that figure: market comparables, hours, functions.
And before you make any move, be clear about how much each path costs: check how much it costs to open a business in the United States and the most common mistakes entrepreneurs make that sink businesses in the first year.
Frequently Asked Questions about LLC vs Corporation
Can I have an LLC and be taxed as an S-Corp at the same time?
Yes, and it's the most common structure for profitable businesses. You file Form 2553, and your LLC maintains its legal form while the IRS treats you as an S-Corp. It's the combination almost everyone is looking for without even knowing what it's called.
Does a Corporation offer more protection than an LLC?
Not necessarily. Both offer limited liability. What truly protects you is adhering to the formalities: separate accounts, up-to-date records, and paid renewals. A well-run LLC offers more protection than a neglected corporation.
Do I need a C-Corp to sell in the United States as a foreigner?
No. A foreigner without a Social Security number can have an LLC, obtain an EIN, and operate. The C-Corp structure comes into play for investment or corporate structure reasons, not due to nationality.
How much does it cost to maintain each structure?
A basic LLC is supported by your annual state tax return (which varies by state) and your personal income tax return. An S-Corp adds payroll and Form 1120-S, which costs between $1,500 and $3,000 annually in accounting. A C-Corp is the most expensive to maintain.
What if I choose the wrong structure?
It can be corrected, but it costs time and money. That's why an hour with an accountant before registering is worth more than a year of overpaying.
Conclusion: The correct structure is the one that reflects your profit today.
In the LLC vs. Corporation debate , there's no single answer; the answer depends on three things: your net income, whether you're seeking investors, and your administration budget. For the vast majority of Hispanic entrepreneurs just starting out, the path is simple: register the LLC, operate legally, and once your net income stabilizes around $75,000–$80,000, sit down with your accountant to evaluate the S-Corp option.
The structure isn't a trophy: it's a tool. Choose the one your business needs today, not the one that sounds the biggest.
Not sure which of the three scenarios applies to you? At Hispanos Emprendedores, we'll help you review your numbers and choose the structure that's right for you before the IRS charges you the difference. Schedule your consultation here.
