LLC vs S-Corp: Which Is Right for You?
The entity structure you choose affects how much you pay in taxes, how you pay yourself, and how your business grows. This guide breaks it down clearly. No jargon, no confusion.
Side-by-Side Comparison
| Feature | LLC (Default) | S-Corp Election |
|---|---|---|
| Formation | File Articles of Organization with the state | Form LLC first, then file Form 2553 with the IRS |
| Taxation | Pass-through: profits taxed on personal return | Pass-through with salary + distribution split |
| Self-Employment Tax | All net income subject to SE tax (15.3%) | Only salary is subject to SE tax. Distributions are not |
| Owner Pay | Owner's draw from profits | Must pay reasonable salary + can take distributions |
| Payroll Required | No | Yes, must run payroll for owner-employees |
| Complexity | Simple, minimal compliance | Moderate, payroll, quarterly filings, reasonable comp |
| Best For | Early-stage, lower revenue, simplicity | Net income above $40K–$50K, want to reduce SE tax |
| Annual Cost | $800 CA franchise tax + minimal | $800 CA franchise tax + payroll costs ($500–$2,000/yr) |
The S-Corp Tax Savings Example
If your business nets $120,000 per year as a single-member LLC, you pay self-employment tax on the entire amount, roughly $18,360.
With an S-Corp election, you pay yourself a reasonable salary of $60,000 and take $60,000 as a distribution. SE tax applies only to the salary portion, saving you approximately $9,180 per year.
When S-Corp Doesn't Make Sense
- Net income is below $40,000, the payroll costs may exceed savings
- You're not ready for the compliance requirements (payroll, quarterly filings)
- Your business has irregular or seasonal income
- You plan to reinvest most profits back into the business
- You're in a state with high S-Corp fees or restrictions
Common Mistakes Business Owners Make
Forming an LLC but never electing S-Corp status
Review your net income annually. If it exceeds $40K–$50K, an S-Corp election could save you thousands.
Setting salary too low to avoid payroll taxes
The IRS requires 'reasonable compensation.' Setting it too low triggers audits and penalties.
Not running payroll as an S-Corp
S-Corp owner-employees must be on payroll. Skipping this is a compliance violation.
Choosing entity structure based on internet advice
Every situation is different. What works for a YouTuber doesn't work for a medical practice.
Waiting until tax season to think about structure
Entity decisions should be made proactively, not reactively. Year-round planning is essential.
Not Sure Which Structure Is Right for You?
Book a free 30-minute Discovery Call and we'll walk through your specific situation together.
All services are educational in nature. WELLTH does not provide legal, tax filing, or investment advisory services. Consult your licensed professionals for implementation.