LLC vs. S-Corp: which one is right for you?

This is one of the most common questions business owners ask, and it is also one of the most misunderstood. Most people frame it as a binary choice: LLC or S-Corp. But that framing gets the relationship between these two things wrong from the start.

Here is the cleaner way to think about it.

An LLC is a legal structure. An S-Corp is a tax election.

These are not competing options. An LLC is how you structure your business legally. An S-Corp is how you ask the IRS to tax that business. Most small business owners who "become an S-Corp" actually form an LLC and then file an election to be taxed as an S-Corp. The LLC stays. Only the tax treatment changes.

So the real question is not LLC vs. S-Corp. It is: should my LLC be taxed as a sole proprietorship (the default) or as an S-Corp?

How a standard LLC is taxed

By default, a single-member LLC is a disregarded entity. The IRS ignores the LLC and taxes you as if you are a sole proprietor. All net profit flows to your personal return and is subject to self-employment tax at 15.3% up to a threshold, then 2.9% above it. No separation between salary and distributions. Every dollar of profit gets hit.

How an S-Corp election changes that

With an S-Corp election, you split your income into two categories: a reasonable salary you pay yourself as an employee, and distributions from the business profit. Payroll taxes apply to the salary. Distributions are not subject to self-employment tax.

On $150,000 of net profit with a $75,000 reasonable salary, you are saving SE tax on $75,000 of income. That is roughly $10,000 to $11,000 in annual savings, less the cost of running payroll and filing a corporate return.

When the S-Corp election makes sense

Generally, the math works in your favor when your net business income consistently exceeds $40,000 to $50,000 per year. Below that, the added costs of payroll and a separate corporate return often outweigh the savings.

Above $80,000 to $100,000 in annual profit, the S-Corp election almost always makes sense if you are structured properly and the timing is right.

What makes the timing tricky

• The S-Corp election must be filed by March 15th of the year you want it to take effect, or within 75 days of forming your entity.
• Late elections are sometimes possible but require IRS approval and a valid reason.
• California has additional rules and fees for S-Corps that affect the calculation for CA-based businesses.
• Once you elect S-Corp status, reversing it is complicated and can have tax consequences.

The bigger picture

The LLC vs. S-Corp decision is not just a tax decision. It is a business structure decision that affects how you pay yourself, how you bring in partners, how you handle payroll, and how your business is perceived by banks and investors. Getting it right from the start, or making the transition at the right time, matters a lot.

This is one of those conversations where 30 minutes with a CPA can save you thousands of dollars and a lot of future headaches.