Choosing the right business structure is one of the earliest—and most impactful—decisions entrepreneurs face. The choice between an LLC (Limited Liability Company) and an S Corporation (S Corp) directly influences how you’re taxed, how you pay yourself, and how much money stays in your pocket.
Both options protect your personal assets, but the tax rules and compliance obligations set them apart. Understanding those differences helps you make the decision that aligns with your income level, goals, and tolerance for paperwork.
LLC Basics
An LLC is often the starting point for new business owners. It’s easy to form, flexible in management, and provides liability protection. Key features include:
- Straightforward setup: Minimal paperwork and fewer compliance hurdles.
- Taxed as you are: Profits are reported on your personal tax return.
- Self-employment tax on all profits: You pay the full 15.3% self-employment tax in addition to income tax.
- Room to grow: You can later elect S Corp or even C Corp taxation if profits justify it.
For many startups and side hustles, an LLC keeps things simple while still offering strong protections.
S Corp Explained
Unlike an LLC, an S Corp isn’t a legal entity—it’s a tax election with the IRS. An LLC or a corporation can apply for S Corp status to take advantage of a different tax structure.
The big shift happens in how income is treated:
- You pay yourself a reasonable salary that’s taxed like any employee’s wages.
- Remaining profits are distributed as dividends, not subject to self-employment tax.
This split can result in meaningful savings, especially as your income grows beyond the $50,000–$70,000 range.
Where the Tax Savings Come From
The core tax advantage of S Corps lies in reducing exposure to self-employment tax.
- In an LLC, all profits are subject to the 15.3% tax covering Social Security and Medicare.
- In an S Corp, only your salary faces that tax. Distributions escape it.
Example: If your net profit is $120,000—
- As an LLC: You pay self-employment tax on the full $120K.
- As an S Corp: Pay yourself a $70K salary (taxed with payroll taxes), and take $50K as distributions (no self-employment tax).
This difference often saves thousands each year, provided compliance is handled correctly.
The Extra Responsibility of S Corps
Those tax savings come with strings attached. S Corp owners must be prepared to:
- Run payroll and file W-2s.
- Pay quarterly payroll taxes.
- File an annual corporate tax return (Form 1120S).
- Keep records, bylaws, and minutes—even if you’re a single owner.
If you prefer simplicity or are not yet profitable, these requirements may outweigh the benefits.
When It Makes Sense to Switch
Not every business is ready for S Corp status. It may be time to consider the move if:
- Net profit is consistently above $50,000–$70,000.
- You want to actively reduce self-employment taxes.
- You already keep strong financial records and can handle—or outsource—payroll.
- Your growth path suggests sustained profitability.
📌 To qualify for the current tax year, Form 2553 must be filed within 75 days of formation or the start of the tax year.
Stories from Business Owners
- A freelance designer earning $80,000 annually saved roughly $4,500 after electing S Corp status and setting a $50K salary.
- A tech consultant making $200,000 switched from LLC to S Corp and reduced their tax bill by more than $15,000.
These examples highlight a common path: start as an LLC for flexibility, then elect S Corp status once profits justify the complexity.
The Bottom Line
Choosing between an LLC and an S Corp comes down to timing and priorities. If you’re early in your business journey, an LLC gives you simplicity, flexibility, and protection with minimal red tape. As your profits grow, electing S Corp status can transform how you’re taxed, allowing you to keep more of what you earn—provided you’re ready for payroll requirements and stricter compliance.
The best structure isn’t about which one looks better on paper—it’s about what makes the most sense for your income, growth plans, and ability to stay compliant. Start lean, upgrade when the numbers support it, and always get tailored advice from a tax professional before making the switch.
