LLC vs. S Corporation: What’s Best for Your Business?

Choosing the right business structure can save you thousands in taxes and protect your personal assets. Two of the most common options for small business owners are the LLC (Limited Liability Company) and the S Corporation (S Corp). While both offer limited liability protection, they differ in how they’re taxed—and that difference could significantly impact your bottom line.

What is an LLC?

An LLC is a flexible business structure that’s easy to form and maintain. It offers liability protection for its owners (called members), and its default tax status is “pass-through”—meaning the business itself doesn’t pay income taxes. Instead, profits pass through to your personal tax return.

Pros:

• Simple setup and compliance

• Liability protection for owners

• Flexible ownership and profit distribution

• Default pass-through taxation (reported on Schedule C or K-1)

  
  

Cons:

• All profits are subject to self-employment tax (15.3%) if you’re actively working in the business

• No built-in mechanism to pay yourself as an employee

What is an S Corporation?

An S Corporation is a tax status that an LLC or corporation can elect. It still offers pass-through taxation, but with a powerful advantage: you can split your income between a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax).

Pros:

• Liability protection

• Pass-through taxation

• Tax savings on self-employment taxes

• Potential to pay yourself as both an owner and an employee

  
  

Cons:

• Requires payroll and additional tax filings (Form 1120-S + W-2)

• Must pay a “reasonable” salary to any owner actively working in the business

• Stricter IRS compliance rules and ownership restrictions

Real Tax Savings: LLC vs. S Corp

Let’s say your business has $100,000 in net profit:

As a standard LLC:

• All $100,000 is subject to self-employment tax (15.3%)

• That’s $15,300 in self-employment tax alone (plus income tax)

As an S Corporation:

• You pay yourself a reasonable salary, say $50,000

• Only the salary is subject to payroll taxes (~$7,650)

• The remaining $50,000 is taken as a distribution, not subject to self-employment tax

• That saves you about $7,650 in taxes

💡 The higher your profits, the bigger your potential tax savings with an S Corp.

When Does an S Corp Make Sense?

Electing S Corp status is typically ideal when your business:

• Has net profits of $50,000+ consistently

• You’re actively working in the business (not just an investor)

• You’re ready to run payroll and file a corporate return

• You want to reinvest or take distributions without overpaying in taxes

Can You Have Both?

Yes! You can form an LLC and then elect to be taxed as an S Corp. This gives you the simplicity and flexibility of an LLC with the tax-saving advantages of an S Corporation.

Final Thoughts

The LLC is perfect for getting started—but once your business is consistently profitable, electing S Corp status could save you thousands each year. Every situation is different, so it’s important to work with a knowledgeable advisor.