When starting or restructuring a business, one of the most common questions entrepreneurs face is: Should I form an LLC or an S-Corporation? Both structures offer liability protection and tax advantages, but the right choice depends on your business goals, income, and growth strategy. Here’s a CPA’s perspective on how to make the right decision.
Understanding the Basics
What Is an LLC?
A Limited Liability Company (LLC) is a flexible business structure that provides liability protection for owners while allowing income to pass directly through to their personal tax returns. It’s often favored by startups, small businesses, and freelancers due to its simplicity and flexibility.
What Is an S-Corp?
An S-Corporation (S-Corp) isn’t a separate legal entity like an LLC, but rather a tax election made with the IRS. By choosing S-Corp status, eligible businesses avoid double taxation while potentially saving money on self-employment taxes.
Key Similarities
- Liability protection – Both LLCs and S-Corps protect personal assets from business debts and lawsuits.
- Pass-through taxation – Both allow profits to pass through to owners’ personal tax returns.
- Credibility – Operating as an LLC or S-Corp enhances professionalism with clients, lenders, and investors.
Key Differences Between an LLC and an S-Corp
- Taxes
- LLC: All profits are generally subject to self-employment tax.
- S-Corp: Owners take a “reasonable salary” (subject to payroll tax) and can receive additional profits as distributions, which are not subject to self-employment tax.
- Ownership
- LLC: Unlimited members, including individuals, entities, and even foreign owners.
- S-Corp: Limited to 100 shareholders, and all must be U.S. citizens or residents.
- Management
- LLC: Flexible structure — can be member-managed or manager-managed.
- S-Corp: More formal structure — requires directors, officers, and regular shareholder meetings.
- Setup & Compliance
- LLC: Easier and less costly to form; fewer ongoing requirements.
- S-Corp: More complex to establish, with stricter IRS rules and annual filing requirements.
Tax Implications to Consider
- LLC taxation – Profits are subject to self-employment taxes, which can be costly for high earners.
- S-Corp taxation – Allows owners to take a “reasonable salary” and then receive additional profits as distributions, reducing payroll taxes.
- IRS scrutiny – S-Corp owners must pay themselves a fair salary; underpaying increases audit risk.
Which Is Right for You?
- Choose an LLC if…
- You want simplicity and flexibility.
- You’re just starting out with moderate income.
- You want minimal administrative requirements.
- Choose an S-Corp if…
- Your business earns consistent profits above $60,000–$80,000.
- You want to reduce self-employment tax liability.
- You’re prepared to handle stricter compliance and payroll requirements.
CPA Insight: Hybrid Approach
Many businesses start as LLCs and later elect to be taxed as S-Corps once profits grow. This hybrid approach provides flexibility early on while capturing tax savings later.
Final Thoughts
Both LLCs and S-Corps offer benefits, but the right structure depends on your unique situation. Entrepreneurs should consider their revenue, growth goals, and compliance capacity before making a decision. Working with a CPA or tax advisor ensures you structure your business in the most tax-efficient way possible while protecting your long-term interests.
