How LLCs Are Taxed: Sole Proprietor, Partnership, S-Corp, or C-Corp

By Dana Whitfield · Published Jan 30, 2027 · 7 min read

In this guide

Single-member LLCs are taxed like sole proprietors by default
Multi-member LLCs are taxed as partnerships by default
Electing S-corp or C-corp treatment
State taxes and fees still apply
The real reasons to form one

Forming an LLC is often the first step a freelancer takes toward "making it official," and many assume it automatically lowers taxes. It usually does not. An LLC is a legal structure created under state law; for federal tax purposes it is taxed as something else, and which something else depends on how many owners it has and what elections it makes.

Single-member LLCs are taxed like sole proprietors by default

A single-member LLC is a "disregarded entity" by default. Its profit and loss flow straight onto the owner's personal return on the same schedule a sole proprietor uses, and the owner pays self-employment tax on net earnings. From a federal tax perspective, nothing changes compared with freelancing without an LLC.

Multi-member LLCs are taxed as partnerships by default

An LLC with two or more owners files a partnership return and issues each member a Schedule K-1 showing their share of income. Members then report that income on their personal returns. Active members generally owe self-employment tax on their share of business income.

Electing S-corp or C-corp treatment

Any LLC can elect to be taxed as a corporation instead.

S-corp election: owners take a reasonable salary through payroll and can receive remaining profit as distributions not subject to self-employment tax
C-corp election: the business pays corporate income tax on its profit, and owners pay tax again on dividends, which rarely suits small service businesses
Either election adds a separate business tax return and more compliance work

State taxes and fees still apply

Separately from federal treatment, many states charge LLCs an annual fee, franchise tax, or minimum tax, and a few impose gross receipts taxes. These costs apply even in years the business earns little, so they belong in any decision about whether an LLC is worth forming.

The real reasons to form one

The main benefits of an LLC are liability separation and a cleaner line between business and personal finances, not tax savings. If tax savings are your goal, the question to model is whether an S-corp election pays off at your income level, which an LLC tax calculator can estimate for you.

This article is for general education only and is not tax or legal advice. Tax rules vary by jurisdiction, change over time, and depend on your specific situation. Talk to a qualified tax professional before making filing or payment decisions.

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