Every tax strategy conversation starts with entity selection. Most small business owners default to LLC because it's the default in most states — but default is not the same as optimal. The right entity structure can save you tens of thousands of dollars in self-employment tax. The wrong one can cost you significantly.
This is a decision that deserves real analysis, not just "what everyone does." Here's a clear breakdown.
The LLC: Simple, Flexible, But Not Tax-Optimized
A single-member LLC is taxed as a sole proprietorship by default. That means all profits flow through to your personal tax return, and you pay self-employment tax (15.3%) on the entire amount. No分离 between salary and distributions. No payroll tax savings.
Multi-member LLCs are taxed as partnerships — same issue. Profits are subject to self-employment tax.
The LLC's real advantage is liability protection and simplicity, not tax savings. If your business earns under $80,000-$100,000 in net profit, the entity structure matters less. Above that threshold, an LLC alone is leaving money on the table.
The S-Corp: The Most Commonly Overlooked Tax Savings Tool
An S-Corp lets you split profits into two categories: a reasonable salary (subject to payroll tax) and distributions (not subject to payroll tax). The salary portion is taxed as W-2 income. The distribution portion is not.
This is the key distinction. In an LLC, every dollar of profit is subject to 15.3% self-employment tax. In an S-Corp, only the salary portion is.
Example: Your business makes $180,000 net profit. With a single-member LLC, you pay self-employment tax on all $180,000 = ~$27,540 in additional tax.
