LLC vs. S-Corp: What Actually Changes for a Small Business

It's a common point of confusion worth clearing up directly: LLC and S-corp aren't really two competing business structures in the way they're often discussed — an LLC is a legal entity type, while S-corp is a tax election. An LLC can actually choose to be taxed as an S-corp while remaining an LLC legally. They're answering two different questions.

As a legal entity, an LLC (Limited Liability Company) primarily protects the owner's personal assets from the business's debts and legal liabilities, with relatively light, flexible formation and ongoing paperwork requirements — one of the reasons it's the default choice for so many small businesses.

By default, a single-owner LLC is taxed essentially like a sole proprietorship — profit passes through to the owner's personal tax return, and the owner pays self-employment tax on the entire profit, not just a salary. That last part is exactly where an S-corp election can matter.

Electing S-corp tax treatment lets an owner split their income into a reasonable salary (subject to normal payroll taxes) and remaining profit distributions (which are not subject to self-employment tax), which can produce real tax savings once the business is profitable enough for that split to matter.

The tradeoff is real added complexity: an S-corp election requires running actual payroll for the owner, more formal recordkeeping, and a separate tax filing, all of which typically means additional accounting cost. Below a certain profit level, that added cost and complexity can outweigh the tax savings — there's a real breakeven point, not a universal answer.

The honest, practical takeaway is that this decision depends specifically on your profit level, your state's rules, and your appetite for additional administrative work — genuinely worth a direct conversation with an accountant who can run your actual numbers, rather than following a generic rule of thumb from an unrelated business.