The decision between an LLC and S-Corp can mean the difference between paying $5,000 or $20,000 in taxes on the same income. Here's everything you need to know to make the right choice.
A Limited Liability Company (LLC) is a legal business structure that protects your personal assets from business liabilities. If your business gets sued or can't pay its debts, your personal home, savings, and other assets are generally protected.
By default, the IRS treats single-member LLCs as sole proprietorships and multi-member LLCs as partnerships for tax purposes. This means all business profit passes through to your personal tax return, and you pay self-employment tax on the entire amount.
An S-Corporation isn't a business structure—it's a tax election you file with the IRS (Form 2553). You can elect S-Corp status whether you're an LLC or a C-Corporation.
The key difference: With S-Corp taxation, you split your business income into two categories: salary (subject to employment taxes) and distributions (NOT subject to self-employment tax). This is where the savings come from.
Most small business owners should operate as an LLC taxed as an S-Corp. This gives you legal liability protection (LLC) AND tax savings (S-Corp election). Best of both worlds.
Let's say your business generates $150,000 in annual profit. Here's how the math works out under each structure:
Business Profit:
$150,000
Self-Employment Tax (15.3%):
-$21,195
Income Tax (approx 22%):
-$28,357
Total Tax:
$49,552
Reasonable Salary:
$70,000
Employment Tax on Salary:
-$10,710
Income Tax (on $150k):
-$28,357
Total Tax:
$39,067
S-Corp taxation isn't right for everyone. Here are the key factors to consider:
Here's the catch with S-Corp taxation: The IRS requires you to pay yourself a "reasonable salary" for the work you do. You can't pay yourself $20,000 and take $130,000 as distributions—that's a red flag for an audit.
So what's "reasonable"? The IRS looks at factors like:
What do others in your role and industry typically earn?
How many hours do you work? What responsibilities do you have?
Your education, experience, and specialized skills matter
Salary should reflect the size and success of your business
A common rule of thumb is to pay yourself 40-60% of business profit as salary, with the remainder as distributions. But this varies by industry and circumstances.
$80,000 profit: ~$35,000-$50,000 salary
$150,000 profit: ~$60,000-$90,000 salary
$250,000 profit: ~$100,000-$150,000 salary
While S-Corp taxation saves you money on self-employment taxes, there are additional costs:
You'll need to run payroll for yourself (typically $40-$100/month for a payroll service)
S-Corps require more complex tax returns (Form 1120-S), typically costing $1,000-$3,000 more than a Schedule C
Some states charge annual S-Corp fees (California charges $800/year, for example)
More paperwork, quarterly payroll tax filings, and stricter recordkeeping requirements
If you've decided S-Corp taxation makes sense for your business, here's the process:
File articles of organization with your state. This typically costs $50-$500 depending on your state.
If you don't have one, apply for an Employer Identification Number (EIN) from the IRS. It's free and takes about 10 minutes online.
This is the S-Corp election form. You must file it no later than 2 months and 15 days after the start of the tax year you want it to take effect.
Choose a payroll service (Gusto, ADP, Paychex, etc.) and set up your reasonable salary.
Get guidance on your reasonable salary amount and ongoing compliance requirements.
Important Deadline: If you want S-Corp status to apply for the current tax year, you generally must file Form 2553 by March 15th. Miss this deadline, and you'll have to wait until the following year (though there are some exceptions for reasonable cause).
The IRS will reclassify distributions as salary if your salary is unreasonably low, costing you back taxes, penalties, and interest.
Payroll taxes must be deposited on time. Late payments trigger penalties that can add up quickly.
If your business isn't consistently profitable yet, wait. The compliance costs might exceed your tax savings.
Keep good records, maintain separate bank accounts, and follow corporate formalities to preserve your liability protection.
For most profitable small businesses, operating as an LLC taxed as an S-Corp provides the optimal balance of liability protection, tax savings, and administrative simplicity.
However, this isn't a one-size-fits-all decision. Your industry, income level, growth plans, and personal circumstances all play a role in determining the best structure for your specific situation.
Every business is different. The choice between LLC and S-Corp taxation depends on your specific numbers, goals, and situation. That's where strategic tax planning comes in.
We'll analyze your business, run the numbers, and show you exactly how much you could save with the right structure—plus help you implement it correctly.
Don't leave thousands of dollars on the table. Our tax strategists will analyze your business and show you exactly how much you can save with the right structure.
We'll help you understand whether S-Corp election makes sense for your situation, determine your reasonable salary, and handle all the paperwork to make the transition seamless.
30-minute complimentary consultation • No obligation