The Question That Trips Up Every New Owner
"Should I be an LLC or an S-Corp?" is the most common entity question I get, and it is built on a misunderstanding. An LLC is a legal structure created by state law. An S-Corp is a tax election made with the IRS. They are not competing options — you can have both at once by forming an LLC and then electing S-Corp tax status on Form 2553.
The real question is: should your LLC stick with default taxation, or should it elect S-Corp status? That decision comes down to one number — your net profit.
Default LLC Taxation: Same as a Sole Proprietorship
A single-member LLC taxed as a disregarded entity pays 15.3% self-employment tax on every dollar of net profit, just like a sole proprietor. The calculation applies the 92.35% factor first, then the 15.3% rate, with the Social Security portion capped at the $168,600 wage base for 2026.
On $120,000 net profit, the SE tax is $17,014 ($120,000 × 92.35% × 15.3%). That is the baseline. Any S-Corp election has to beat this number after accounting for added costs.
S-Corp Election: The Salary-Plus-Distribution Split
Elect S-Corp status and the picture changes. The owner takes a reasonable salary — say $60,000 — and the remaining $60,000 as a distribution. Payroll tax applies only to the salary.
| Structure | Tax Base | Rate | Tax Owed |
|---|---|---|---|
| LLC (default, sole-proprietor taxation) | $120,000 × 92.35% | 15.3% SE tax | $17,014 |
| LLC electing S-Corp status ($60k salary) | $60,000 salary | 15.3% payroll tax | $9,180 |
| S-Corp distribution portion | $60,000 distribution | 0% (no SE/payroll tax) | $0 |
| S-Corp total | $9,180 | ||
| Savings | $7,834 |
Subtract S-Corp compliance costs — payroll service ($500–$1,500), Form 1120-S preparation ($800–$2,000), state S-Corp fees — and net savings land around $5,300–$6,300. On $120,000 of profit, the S-Corp election clearly wins.
When the LLC Default Actually Wins
At lower profit levels, the fixed cost of S-Corp compliance eats the savings. A $40,000-profit LLC owes about $5,652 in SE tax. An S-Corp with a $30,000 salary would owe $4,590 in payroll tax — a savings of just $1,062, which barely covers payroll service fees. Below $60,000–$80,000 in profit, the default LLC taxation usually wins on simplicity.
Compliance Burden Comparison
The S-Corp election is not free in time or paperwork. Here is what each structure requires:
- Default LLC: Schedule C on personal return, quarterly SE-tax estimates, no payroll
- S-Corp LLC: Form 1120-S by March 15, Schedule K-1, formal payroll with Form 941 quarterly, W-2 issuance, reasonable salary documentation
- Both: State annual reports, registered agent, separate business bank account, operating agreement
If you dislike admin work or your profit is volatile year to year, the simplicity of default LLC taxation has real value. The S-Corp election rewards owners with stable, predictable profit above the breakeven threshold.
Ownership Rules That Affect the Choice
LLCs allow unlimited owners of any type — individuals, corporations, partnerships, foreign owners. S-Corps restrict ownership to 100 or fewer U.S. resident individuals, with one class of stock. If you expect to add investors or non-U.S. partners, the default LLC structure stays flexible while an S-Corp election locks you out.
The Bottom Line
An LLC taxed as a sole proprietorship is simpler and cheaper to run, making it the right default for owners under $60,000–$80,000 in profit. Above that threshold, electing S-Corp status on your LLC usually saves $4,000–$8,000 per year in SE tax after compliance costs. The decision hinges on profit stability and your tolerance for payroll paperwork. Model both scenarios with the Self-Employment Tax Calculator, identify deductions with the Tax Deduction Finder, and revisit the election annually as your profit grows.