LLC vs. S-Corp: How to Choose the Right Structure and Save on Taxes

When you started your business, you probably chose the simplest path: forming an LLC. It gave you legal protection, straightforward tax filing, and the flexibility to focus on growing your business. But now that you’re generating more consistent income, you may be asking the next logical question:

Should I switch to an S-Corp?

The answer? It depends—and the wrong choice could cost you thousands in unnecessary taxes or compliance issues.

What Is an LLC?

An LLC, or Limited Liability Company, is a popular business structure because it’s flexible, affordable, and easy to manage. By default, an LLC is treated as a pass-through entity—that means the business itself doesn’t pay federal income taxes. Instead, all profits and losses flow directly to your personal tax return.

But here’s the catch: you’ll pay self-employment tax (15.3%) on all of your net profit. So if your business earns $100,000 in profit, you’ll owe $15,300 in self-employment taxes alone—before you even consider income tax.

What Is an S-Corp?

An S-Corp isn’t a type of business—it’s a tax classification you elect with the IRS. You’re still operating as an LLC or corporation at the state level, but the way your income is taxed changes.

Here’s how: as an S-Corp, you’re required to pay yourself a reasonable salary through payroll. That salary is subject to payroll taxes (just like any W-2 job), but any additional profit can be taken as a distribution, which is not subject to self-employment tax.

This simple shift can result in significant tax savings, especially as your profit grows.

Real-World Example

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

• As an LLC: You pay self-employment tax on the entire amount = $15,300

• As an S-Corp:

  • You pay yourself a $60,000 salary = $9,180 in payroll taxes

  • Take the remaining $40,000 as a distribution = no self-employment tax

  • Total tax savings: ~$6,120

Not bad, right?

So When Should You Switch?

While the tax savings can be real, the S-Corp route isn’t for everyone. Here’s when it usually makes sense:

• You’re earning $50,000 or more in net profit consistently

• You’re ready to run payroll and keep clean financial records

• You’re comfortable filing an extra tax return (Form 1120-S) each year

• You want to be more strategic with how you pay yourself

If you’re not quite there yet—or don’t want the extra compliance just yet—sticking with your LLC setup may be the better choice for now.

Common Mistakes to Avoid

• Electing S-Corp status too early without enough income to justify the cost

• Not paying yourself a reasonable salary—a big red flag for the IRS

• Skipping payroll and just transferring money from your business account

• Missing IRS or state filing requirements for S-Corp compliance

• Mixing personal and business finances, which weakens liability protection

  
  

Final Thoughts

Choosing between an LLC and an S-Corp isn’t just a legal decision—it’s a financial one. The structure you choose will impact how you get paid, how much tax you owe, and how confident you feel come tax time.

If you’re earning solid revenue and ready to take the next step, this session will give you the clarity you need to move forward confidently.

See you there.