LLC vs S-Corp
The two most popular business structures for small businesses -- and when to switch.
LLC and S-Corp are the two business structures that small business owners debate most. An LLC provides flexibility and simplicity, while an S-Corp election can save thousands in self-employment taxes once your income is high enough. Understanding when an S-Corp makes financial sense -- and when it doesn't -- is one of the most important tax planning decisions you'll make.
LLC (Limited Liability Company)
Flexible protection with pass-through simplicity
Advantages
- Simple to form and maintain with minimal paperwork
- Flexible tax treatment -- choose to be taxed as sole prop, partnership, or corporation
- No ownership restrictions -- any number of members, foreign owners allowed
- Pass-through taxation avoids double taxation by default
- Fewer compliance requirements than a corporation
Drawbacks
- Self-employment taxes apply to all net income (15.3% on first $168,600)
- No ability to split income into salary and distributions without S-Corp election
- Some states charge additional LLC fees or franchise taxes
- Less familiar to investors compared to corporations
S-Corp (S Corporation Election)
Save on self-employment taxes with salary-distribution splitting
Advantages
- Split income into salary (subject to payroll taxes) and distributions (not subject)
- Can save $5,000-$20,000+/year in self-employment taxes at higher income levels
- Still provides pass-through taxation -- no double taxation
- Adds credibility with some clients and lenders
- Shareholders can be employees with W-2 benefits
Drawbacks
- Must pay yourself a reasonable salary -- IRS scrutinizes this
- Required to run payroll, adding $500-$2,000+/year in cost
- Stricter compliance: corporate minutes, bylaws, board meetings
- Limited to 100 shareholders, all must be U.S. citizens or residents
- One class of stock only -- limits equity flexibility
Feature Comparison
| Feature | LLC (Limited Liability Company) | S-Corp (S Corporation Election) |
|---|---|---|
| Formation Process | Articles of Organization filed with state; $50-$500 | Form LLC or Corp first, then file Form 2553 with IRS |
| Liability Protection | Full personal asset protection from business debts | Full personal asset protection |
| Tax Treatment | Pass-through (Schedule C for single-member) | Pass-through with salary/distribution split |
| Self-Employment Tax | 15.3% on all net business income | Payroll taxes on salary only; distributions avoid FICA |
| Ownership Restrictions | No restrictions on member count or type | Max 100 shareholders; U.S. citizens/residents only |
| Ongoing Compliance | Minimal -- annual report in most states | Annual reports, corporate minutes, payroll filings, reasonable salary documentation |
| Payroll Requirements | Not required for single-member LLCs | Required -- must run payroll for owner-employees |
| Best At Income Level | Under $60K-$80K net profit | Above $80K-$100K+ net profit |
LLC (Limited Liability Company) Wins
An LLC is the right starting structure for most businesses, with an S-Corp election becoming worthwhile only when net profits consistently exceed $80K-$100K.
The math is simple: an S-Corp saves money on self-employment taxes by letting you take distributions that aren't subject to the 15.3% FICA tax. But it costs money to maintain (payroll service, CPA, compliance). Below about $80K in net profit, the savings don't exceed the costs. Above that threshold, S-Corp savings can be substantial -- a business netting $150K might save $10,000-$15,000/year in taxes. The optimal path for most entrepreneurs is to start as an LLC, and elect S-Corp status (by filing Form 2553) once profits consistently justify the added complexity. You can make this election without forming a new entity -- an LLC can be taxed as an S-Corp.