Why Does Business Structure Matter?
Your business structure affects how much you pay in taxes, your personal liability, and your administrative requirements. For many small business owners, the choice between S-Corp and LLC is the most important tax decision they will make.
Understanding LLC Taxation
A single-member LLC is taxed as a sole proprietorship by default. A multi-member LLC is taxed as a partnership. In both cases, all business income passes through to your personal tax return and you pay self-employment tax on the entire amount.
Understanding S-Corp Taxation
An S-Corp is also a pass-through entity, but there is a key difference: you can pay yourself a reasonable salary (subject to employment taxes) and take the remaining profits as distributions (not subject to employment taxes). This is where the tax savings come in.
The Tax Savings Example
If your business makes $150,000 profit: As an LLC, you pay self-employment tax on $150,000 (about $21,000). As an S-Corp paying yourself a $75,000 salary, you pay employment tax on $75,000 (about $11,000) plus income tax on all $150,000. The difference can be thousands per year.
When LLC Makes Sense
LLC is often better when: Your profit is under $80,000 (the S-Corp savings may not justify the extra paperwork), You want simplicity, or You plan to bring on investors (C-Corp may be better).
When S-Corp Makes Sense
S-Corp often makes more sense when: Your profit exceeds $80,000-$100,000, You want to minimize employment taxes, You have consistent profits year after year, or You are already operating as an LLC and want to elect S-Corp status.
