S-Corp vs LLC — Which Is Right for Your Business?

One of the most common questions we get from business owners is: "Should I be an LLC or an S-Corp?" The short answer is: it depends on your income. The longer answer involves understanding what each structure actually does — and what it costs you.

What an LLC Actually Does

An LLC (Limited Liability Company) is a legal entity that protects your personal assets from business liabilities. If your company gets sued, your house and personal savings are generally protected.

But here's what most people don't realize: an LLC is not a tax classification. By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. That means all your profit is subject to self-employment tax — currently 15.3% on the first $168,600 (2024) and 2.9% above that.

What an S-Corp Election Does

An S-Corp is a tax election, not a separate legal entity. You can keep your LLC and simply elect to be taxed as an S-Corp by filing Form 2553 with the IRS.

The key benefit: as an S-Corp, you split your income into two buckets — salary (which you must pay yourself) and distributions (profit that flows through to your personal return). Only the salary is subject to payroll taxes. Distributions are not.

The Math That Matters

Let's say your business profits $300,000 in a year.

As a sole proprietor or default LLC, you pay self-employment tax on the entire $300,000. That's roughly $42,000 in self-employment taxes alone — before income tax.

As an S-Corp, you pay yourself a reasonable salary of $120,000. You pay payroll taxes on that $120,000 (roughly $18,360). The remaining $180,000 comes to you as a distribution with zero self-employment tax.

The savings: approximately $23,000 per year. Every year.

When Does the S-Corp Make Sense?

The general rule of thumb: once your business consistently profits more than $60,000–$80,000 per year after paying yourself, the S-Corp election usually saves you money.

Below that threshold, the additional costs of running an S-Corp — mandatory payroll, potentially higher accounting fees, and stricter compliance requirements — may eat into the savings.

The "Reasonable Salary" Requirement

The IRS requires S-Corp owners to pay themselves a "reasonable salary" — meaning what you'd pay someone else to do your job. You can't pay yourself $30,000 while taking $270,000 in distributions. The IRS watches for this, and getting it wrong can trigger penalties.

This is where having an advisor who understands your industry matters. A reasonable salary for a construction company owner doing $3M in revenue is very different from a freelance graphic designer. We help our clients set compensation that's defensible and optimized.

What About the C-Corp?

C-Corps have a flat 21% federal tax rate, which sounds attractive. But C-Corp income is taxed twice — once at the corporate level and again when distributed to you as dividends. For most small business owners under $10M in revenue, the S-Corp or LLC structure is still more tax-efficient.

There are exceptions — especially if you're reinvesting heavily in the business and not taking distributions. But that's a conversation for your strategy call, not a blog post.

The Bottom Line

The right entity structure isn't about what's trendy or what your friend did. It's about your specific revenue, expenses, growth plans, and state tax situation. And it should be reviewed every year as your business grows, because what worked at $500K may not work at $3M.