Choosing between an LLC and an S-Corp is one of the most consequential early decisions for small business owners. The right answer depends on your profit level, the number of owners, your state of formation, and how much administrative complexity you can manage.

This guide walks you through the key differences and lets you use our interactive decision wizard to get a personalized starting point. Remember: this tool helps you think through the trade-offs — it does not replace advice from a CPA or business attorney.

The Core Difference: Taxation

Both LLCs and S-Corps are pass-through entities, meaning the business itself doesn’t pay federal income tax. Profits and losses flow through to your personal tax return. The critical difference is self-employment (SE) tax.

As an LLC owner, all of your net profit is subject to the 15.3% SE tax (12.4% Social Security + 2.9% Medicare). As an S-Corp owner, you pay SE tax only on your salary — the remaining profits taken as distributions are not subject to SE tax. At higher income levels, this can produce meaningful annual savings.

The catch: S-Corp status requires you to pay yourself a “reasonable salary,” maintain payroll, file additional forms, and handle more complex annual compliance. At lower profit levels, these costs often outweigh the savings.

When Does an S-Corp Make Sense?

Most tax professionals suggest considering an S-Corp election when net self-employment profit consistently exceeds $80,000 per year. Below that threshold, the compliance costs and payroll fees typically eat up any SE tax savings. Above it, the math often favors the election.

Other factors that point toward S-Corp status include: you’re comfortable running payroll, you have a simple ownership structure (one class of stock required), and your state doesn’t impose heavy additional fees on S-Corps (California, for example, charges extra franchise tax and fees).

When Does an LLC Work Better?

An LLC is the right choice if you’re early-stage, want maximum simplicity, have multiple owners who need flexible profit splits, or your income hasn’t yet reached the threshold where SE tax savings are meaningful. An LLC also gives you the option to elect S-Corp status later by filing IRS Form 2553 — you don’t have to choose forever.

Multi-member LLCs are especially flexible. Unlike S-Corps, they can accommodate different ownership classes, profit-sharing arrangements, and membership interests without restriction.

Use the Decision Wizard

The wizard below asks five questions and gives you a personalized recommendation based on your specific situation. It’s a starting point, not a final answer — but it will help you walk into your CPA conversation better informed.

Key Terms You’ll Hear

Reasonable compensation: The IRS requires S-Corp owner-employees to pay themselves a salary that is “reasonable” for the work they perform. Underpaying yourself to minimize SE tax is a red audit flag.

Form 2553: The IRS form you file to elect S-Corp status. It must be filed within 75 days of the start of the tax year you want the election to take effect, or by March 15 for the prior year.

Self-employment tax: The 15.3% tax on net self-employment income that covers Social Security and Medicare. For W-2 employees, employers pay half — self-employed individuals pay all of it.

Pass-through taxation: Income passes through the business to the owner’s personal tax return, avoiding corporate-level federal income tax.

Next Steps

Use the wizard above to get your initial recommendation, then schedule a consultation with a licensed CPA or business attorney in your state. Tax laws, state fees, and compliance requirements vary significantly — what’s optimal in Texas may look different in California or New York.

For related reading, explore our guides on business banking, quarterly estimated taxes, and setting up bookkeeping for your LLC or S-Corp.