One of the most common questions we hear from small business owners, freelancers, and self-employed professionals is: "Should I be an LLC or an S-Corp?" The answer depends on how much you earn, how your business operates, and what your long-term goals look like. Here's what you actually need to know.
What Is an LLC?
A Limited Liability Company (LLC) is a business structure that separates your personal assets from your business liabilities. If someone sues your business or you take on business debt, your personal savings, home, and car are generally protected.
By default, a single-member LLC is taxed as a sole proprietorship. That means all of your business profit flows directly to your personal tax return on Schedule C. You pay income tax and self-employment tax (15.3%) on the full amount. (See our guide on how much to set aside for taxes.)
What Is an S-Corp?
An S-Corp is not actually a business entity - it's a tax election. You can form an LLC and then elect to have it taxed as an S-Corp by filing IRS Form 2553. The LLC still exists legally, but the IRS treats it differently for tax purposes.
The key difference: as an S-Corp, you pay yourself a "reasonable salary" and only pay self-employment taxes (Social Security and Medicare) on that salary. Any remaining profit is distributed to you as a shareholder distribution, which is not subject to self-employment tax.
If your business earns $120,000 in profit and you pay yourself a $60,000 salary, you only pay self-employment tax on the $60,000 salary. The remaining $60,000 distribution is subject to income tax but not the 15.3% SE tax - saving you roughly $9,180 per year.
Side-by-Side Comparison
| Feature | LLC (Default) | S-Corp Election |
|---|---|---|
| Self-Employment Tax | Paid on all net profit | Paid only on salary |
| Payroll Required | No | Yes - must run payroll |
| Tax Filing | Schedule C on personal return | Separate S-Corp return (Form 1120-S) |
| Administrative Cost | Low | Higher (payroll, separate filing) |
| Best For | Businesses under ~$50-60K profit | Businesses consistently above ~$60K+ profit |
| Retirement Plans | SEP-IRA, Solo 401(k) | SEP-IRA, Solo 401(k), plus employer match options |
When Does an S-Corp Make Sense?
The S-Corp election starts to make financial sense when your business consistently earns enough profit that the self-employment tax savings outweigh the added costs of running payroll and filing an additional tax return. For most people, this tipping point is somewhere around $50,000-$70,000 in annual net profit, though it varies.
Here are some signs it might be time to consider the S-Corp election:
- Consistent profit above $60K: You've been earning well above this threshold for at least a year
- Stable income: Your revenue isn't wildly unpredictable month to month
- You're paying significant SE tax: You notice a large self-employment tax line on your return
- You plan to reinvest: You don't need to draw every dollar out of the business
When Should You Stay as an LLC?
If you're just starting out, your income fluctuates significantly, or your profit is under $50K, staying as a default LLC is usually the simpler and more cost-effective choice. The administrative burden and payroll costs of an S-Corp can eat into (or even exceed) the tax savings at lower income levels.
The IRS requires S-Corp owners to pay themselves a "reasonable salary" before taking distributions. If you set your salary too low, it can trigger an audit. This is one of the most common mistakes business owners make with the S-Corp election.
What About a C-Corp?
For most small business owners, freelancers, and solopreneurs, a C-Corp adds unnecessary complexity. C-Corps face double taxation - the corporation pays tax on its profits, and then shareholders pay tax again on dividends. C-Corps are typically better suited for businesses seeking venture capital or planning to go public.
How to Make the Switch
If you already have an LLC and want to elect S-Corp status, you file Form 2553 with the IRS. The deadline is March 15 of the tax year you want the election to take effect (or within 75 days of forming your LLC). Once you make the switch, you'll need to set up payroll and manage quarterly tax obligations. Late elections are sometimes accepted with reasonable cause.
Before making the switch, we strongly recommend sitting down with an accountant to run the numbers for your specific situation. The savings look different for every business.
The Bottom Line
There's no one-size-fits-all answer. The right structure depends on your income level, your business goals, and how much administrative work you're willing to take on. The most important thing is to make an informed decision - not just follow what you heard from someone on social media.
At TFMA, we help business owners evaluate their structure every year and make adjustments as their income and goals change. If you're unsure whether you should stay as an LLC or elect S-Corp status, book a consultation and we'll walk through the math together.