One of the most common questions we get from new business owners is: Should I form an LLC or elect S-Corp status? The answer depends on your income level, growth plans, and how much administrative complexity you are willing to manage.
What Is an LLC?
A Limited Liability Company provides personal liability protection while allowing profits to pass through to your personal tax return. By default, a single-member LLC is taxed as a sole proprietorship ??? all net profit is subject to self-employment tax (15.3%).
What Is an S-Corp?
An S-Corporation is a tax election, not a separate business entity. An LLC can elect to be taxed as an S-Corp. The key benefit: you pay yourself a reasonable salary and only that salary is subject to self-employment taxes. Remaining profits are distributed as dividends ??? not subject to SE tax.
The Tax Savings Example
Say your business nets $150,000 per year. As an LLC you pay roughly $21,195 in SE taxes on the full amount. As an S-Corp, paying yourself an $80K salary results in about $11,304 in SE tax plus a $70K distribution with no SE tax ??? saving nearly $10,000 per year.
When Does S-Corp Make Sense?
Generally, the S-Corp election becomes worthwhile when your net profit consistently exceeds $50,000-$60,000 per year. Below that threshold, the added administrative costs may outweigh the savings.
Our team can run the numbers for your specific situation and handle the entire formation process. Book a free consultation to get started.
