The Quick Answer
Start with an LLC. It's simple, flexible, and you can always elect S-Corp status later when your profit justifies the complexity.
Once you're making $60K-$80K+ in profit consistently, that's when S-Corp election starts saving you serious money on taxes.
What's the Difference?
⚠️ Important Distinction
LLC is a business structure. S-Corp is a tax election. They're not mutually exclusive—you can be an LLC taxed as an S-Corp.
LLC (Limited Liability Company) — Business Structure
An LLC is a legal business structure that protects your personal assets from business liabilities. When you form an LLC, you file Articles of Organization with your state.
Default taxation: Single-member LLCs are taxed as sole proprietorships. Multi-member LLCs are taxed as partnerships. Both are pass-through (profits go to your personal tax return).
BUT — You can elect S-Corp taxation for your LLC by filing Form 2553 with the IRS.
S-Corp Election — Tax Status
S-Corp is NOT a business structure—it's a tax election you make with the IRS. You're still an LLC (or Corporation) legally, but you're taxed differently.
How it works: You split your income into salary (subject to payroll taxes at 15.3%) and distributions (NOT subject to self-employment tax). This saves money on taxes.
Common setup: LLC (structure) + S-Corp election (tax treatment) = LLC taxed as S-Corp.
Side-by-Side Comparison
| Feature | LLC | S-Corp |
|---|---|---|
| Setup Complexity | Simple. File Articles of Organization with state. | More complex. Must file 2553 with IRS + state requirements. |
| Annual Compliance | Minimal. Annual report in most states. | Moderate. Payroll, shareholder meetings, corporate minutes. |
| Taxation | Pay self-employment tax (15.3%) on all profit. | Pay payroll tax on salary only. Distributions avoid SE tax. |
| Payroll Required? | No. Draw money as needed. | Yes. Must run payroll and pay yourself "reasonable salary." |
| Ongoing Costs | $50-300/year (state fees) | $1,200-3,600/year (payroll service + fees) |
| Ownership Flexibility | Unlimited owners, any entity type. | Max 100 shareholders, must be US citizens/residents. |
| Profit Distribution | Flexible. Can distribute unequally. | Must distribute proportional to ownership %. |
| Best For | New businesses, under $60K profit, simple structure | Established businesses, $80K+ profit, optimizing taxes |
The Tax Difference (With Real Numbers)
This is where S-Corp really shines—if you're profitable enough.
Example: $100K Profit
As an LLC
- Profit: $100,000
- Self-employment tax (15.3%): $15,300
- Income tax (22% bracket): ~$12,000
- Total tax: ~$27,300
As an S-Corp
- Salary: $50,000 (reasonable for your role)
- Distribution: $50,000
- Payroll tax on salary (15.3%): $7,650
- Income tax (same bracket): ~$12,000
- Total tax: ~$19,650
Annual Tax Savings: ~$7,650
That's why S-Corp election makes sense once you're profitable.
Important Caveat:
You MUST pay yourself a "reasonable salary" as an S-Corp owner. The IRS will come after you if you pay yourself $10K salary and take $90K distributions on $100K profit. Reasonable = what someone doing your job would make in your market.
When to Choose LLC
- You're just starting out. Keep it simple until you have traction.
- Your profit is under $60K. Tax savings don't justify the complexity yet.
- You want flexibility. LLCs allow unequal profit splits, multiple ownership classes.
- You're a solo entrepreneur. Don't want the hassle of payroll for just yourself.
- You're not sure about the business yet. LLC is easy to dissolve if things don't work out.
When to Choose S-Corp (or Elect S-Corp Status)
- You're making $60K-$80K+ profit consistently. Tax savings justify the compliance costs.
- You can afford payroll. You're okay with $100-300/month for a payroll service.
- You're organized. Can handle quarterly payroll taxes, annual shareholder meetings, corporate minutes.
- You plan to scale. S-Corps look more professional to lenders and investors.
- You want to minimize self-employment taxes. The main reason to go S-Corp.
Can You Start as LLC and Become S-Corp Later?
Yes. This is the most common path and what we usually recommend.
The Process:
- Start as an LLC (simple, cheap, flexible)
- Grow your business, build profit
- Once profit hits $60-80K consistently, run the numbers
- If tax savings justify complexity, file Form 2553 with IRS to elect S-Corp status
- Set up payroll, start paying yourself a salary
Timeline: You can elect S-Corp status anytime. Most common is at year-end when you review your financials and realize you paid too much in self-employment taxes.
Common Mistakes Entrepreneurs Make
Mistake #1: Choosing S-Corp Too Early
The problem: You elect S-Corp when you're making $20K profit. Now you're paying $1,500+/year in payroll fees to save $500 in taxes.
The fix: Stay LLC until profit justifies the switch. Do the math first.
Mistake #2: Paying Yourself Too Little as S-Corp
The problem: You make $100K profit, pay yourself $15K salary, take $85K distributions. IRS flags your return for audit.
The fix: Pay yourself a reasonable salary (40-60% of profit is common). Ask your accountant.
Mistake #3: Forgetting About Payroll Taxes
The problem: You elect S-Corp but don't set aside money for payroll taxes. Tax time is painful.
The fix: Use a payroll service (Gusto, ADP) that handles withholdings automatically.
Mistake #4: Not Keeping Corporate Formalities
The problem: You're an S-Corp but don't hold annual meetings or keep minutes. You lose liability protection.
The fix: Even if it's just you, document decisions, hold annual meetings, maintain the corporate veil.
Decision Framework: Should You Switch to S-Corp?
Use this simple checklist:
Is your net profit consistently over $60K?
If NO → Stay LLC
If YES → Continue...
Will your tax savings exceed $3,000/year?
(Calculate: Net profit × 15.3% × 50% - $1,500 payroll costs)
If NO → Stay LLC
If YES → Continue...
Are you willing to run payroll and handle compliance?
If NO → Stay LLC (simplicity has value)
If YES → Elect S-Corp status
Texas-Specific Notes
If you're in Texas (like we are), here's what you need to know:
- No state income tax. Texas doesn't tax personal or corporate income, so S-Corp only saves you on federal self-employment tax.
- Franchise tax: Both LLCs and S-Corps pay Texas franchise tax if revenue exceeds $1.23M (most small businesses don't).
- Formation costs: LLC filing fee: $300. S-Corp (filing Articles of Incorporation): $300. Same cost.
- Annual report: LLCs don't file annual reports in Texas. S-Corps file franchise tax reports annually (even if no tax owed).
Still Not Sure Which to Choose?
We help entrepreneurs choose the right entity structure based on your specific situation—not generic advice from Google.