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LLC vs S-Corp: Which Structure is Right for Your Business?

‘Should I be an LLC or an S-Corp?’

I get this question at least three times a week. And honestly? I love it, because it means you’re thinking about your business structure instead of just defaulting to whatever sounds easiest or whatever some website told you to do.

But here’s where most people get confused: LLC and S-Corp aren’t actually the same type of thing. An LLC is a legal structure (how your business is organized under state law). An S-Corp is a tax classification (how the IRS taxes your business income). You can actually be both at the same time: an LLC that elects to be taxed as an S-Corp.

I know that sounds confusing, so let me break it down in plain English. With over 22 years of experience helping Northern Virginia business owners figure this out, I can tell you exactly when each structure makes sense and when it doesn’t.

Let’s Start With the Basics: What’s an LLC?

LLC stands for Limited Liability Company. The key word there is ‘liability.’ It protects your personal assets if your business gets sued or goes into debt. Your house, your car, your personal bank accounts are generally protected from business creditors.

How an LLC is taxed by default:

  • Single-member LLC (just you):The IRS treats it like you’re a sole proprietor. All the business income flows through to your personal tax return on Schedule C. You pay income tax and self-employment tax (15.3% for Social Security and Medicare) on every dollar of profit.
  • Multi-member LLC (you and partners):The IRS treats it like a partnership. Each member reports their share of profit on their personal return and pays self-employment tax on it.

Real example: A Bristow marketing consultant runs her business as a single-member LLC. She made $95,000 profit in 2025. She pays about $14,535 in self-employment tax (15.3% of $95,000) plus her regular income tax. Total federal tax bill: around $28,000 to $32,000 depending on deductions.

Now, What’s an S-Corp?

An S-Corporation isn’t a business structure. It’s a tax election. It’s a way of telling the IRS, ‘Hey, I want to be taxed differently.’

Here’s the big advantage: with an S-Corp, you split your income into two categories:

  • Salary (W-2 wages):You pay yourself a reasonable salary for the work you do. This is subject to payroll taxes (Social Security and Medicare).
  • Distributions (profit):Any remaining profit can be taken as a distribution. This is NOT subject to self-employment tax, only income tax.

That’s the whole game. You’re avoiding the 15.3% self-employment tax on a portion of your income.

The Tax Savings Example Everyone Wants to See

Let me show you the actual numbers. Say you made $100,000 profit in your business.

As an LLC (default tax treatment):

  • All $100,000 is subject to self-employment tax
  • Self-employment tax: $100,000 × 15.3% = $15,300
  • Plus income tax on top of that

As an S-Corp:

  • You pay yourself a $60,000 salary (reasonable for your role)
  • Payroll tax on salary: $60,000 × 15.3% = $9,180
  • Remaining $40,000 taken as distribution (no self-employment tax)
  • Tax savings: $15,300 minus $9,180 = $6,120 per year

That’s over $6,000 back in your pocket every year. Over five years, that’s more than $30,000.

But Wait: There’s a Catch (Actually, Several)

S-Corps aren’t free. There are real costs and responsibilities that come with electing S-Corp status. And I’ve seen plenty of business owners rush into it without understanding what they’re getting into.

  1. You Must Run Actual Payroll

You have to run real payroll for yourself. That means withholding taxes, filing quarterly payroll tax returns (Form 941), issuing yourself a W-2 at year end, and paying yourself on a regular schedule. You can’t just take money out whenever you feel like it. At LMN Tax, we handle payroll for our S-Corp clients, which makes this much easier. Cost if you do it yourself with software: $40 to $150 per month ($500 to $1,800 per year).

  1. Your Salary Must Be ‘Reasonable’

The IRS says your salary has to be ‘reasonable’ for the work you do. You can’t pay yourself $20,000 and take $80,000 in distributions when you’re the only person running the business. The IRS will reclassify those distributions as wages and hit you with penalties. A good rule of thumb: 40 to 60% of your profit should be salary, depending on your industry.

  1. More Complex Tax Returns and Bookkeeping

S-Corps file Form 1120-S every year, which is more complicated than Schedule C. You also need proper bookkeeping throughout the year to track salary versus distributions correctly. At LMN Tax, S-Corp tax preparation starts at $2,500, and quarterly bookkeeping runs about $3,000 per year. That’s on top of payroll costs.

Real example: A Haymarket dentist elected S-Corp status. Between payroll processing ($1,200/year), S-Corp tax return preparation ($2,500/year), and quarterly bookkeeping ($3,000/year), his S-Corp costs him $6,700 annually. His tax savings? $11,016. Net savings after costs: $4,316. Now that’s actually worth it.

So When Does an S-Corp Actually Make Sense?

Here’s the threshold I use with my clients:

If you’re making less than $60,000 in profit: Stick with an LLC. The tax savings won’t cover the extra costs. I tell people this all the time: don’t overcomplicate your life when you’re still building.

If you’re making $60,000 to $80,000: It’s a toss up. Run the actual numbers. The tax savings might be $3,000 to $5,000, but after all the costs ($6,000 to $7,000 annually), you might barely break even or net only $1,000 to $2,000.

If you’re making over $80,000: S-Corp probably makes sense. The tax savings start to significantly outweigh the costs. I have Rockville tech consultants saving $8,000 to $12,000 per year once they cross the $120,000 profit mark.

When You Should Just Stay an LLC

Your income fluctuates wildly. Payroll requires consistent, regular payments. If you make $15,000 one month and $2,000 the next, an S-Corp is a nightmare to manage.

You’re just starting out. Wait until you have at least one full year of consistent profit before switching. You need to know what your baseline is. Don’t add complexity when you’re still figuring out your business model.

You want maximum simplicity. If the thought of running payroll and tracking salary versus distributions stresses you out, the tax savings might not be worth it. Some of my clients value peace of mind over saving $2,000.

You have losses or break even. S-Corp only helps when you have profit. If you’re still in the red or barely breaking even, there’s no benefit. Wait until you’re solidly profitable.

The Husband and Wife Conversation I Have All the Time

Let me tell you about a scenario I see constantly. A couple video calls me (we’re digital first, so most consultations are virtual). The husband owns a business making $110,000. He’s heard about S-Corp from a friend and wants to switch. The wife is skeptical because she handles the bookkeeping.

Husband: ‘We could save $6,000 a year!’

Wife: ‘But who’s going to do the payroll every two weeks? Who’s filing the quarterly reports? And how much is all of this going to cost us?’

For the record, I usually take the wife’s side on this. Not because the husband is wrong about the tax savings, but because the wife is thinking practically about implementation. If you don’t have systems in place to handle payroll correctly, the savings evaporate quickly when you’re paying penalties for late filings or hiring someone to fix your mistakes.

My advice to them: if you’re going to do S-Corp, either use a payroll service like we offer at LMN Tax, or make absolutely sure you can handle the administrative burden. Don’t wing it.

How to Make the Switch to S-Corp

If you decide S-Corp makes sense, here’s how it works:

  • File Form 2553 with the IRS (Election by a Small Business Corporation)
  • The deadline is March 15 if you want it to take effect for the current tax year
  • Set up payroll (this is where most people get stuck)
  • Start paying yourself a regular salary (biweekly or monthly)

Most of my clients who switch to S-Corp status stay there. Once you’re set up, it runs pretty smoothly. But you have to be ready for the commitment upfront.

A Word About Those $100 Online LLCs

I can’t tell you how many times someone comes to me with an LLC they bought online from one of those legal websites for $99 or $149. They’re so proud. ‘Look, I formed my LLC for cheap!’

Then I look at what they actually got. The business purpose is too broad or too narrow. They didn’t elect S-Corp status even though they should have. They never got an EIN. They have no operating agreement. The registered agent is some random address they don’t recognize.

And now I have to fix it, which often costs more than if they’d just done it right from the start.

Look, I’m not saying those services are evil. But they give you a very basic LLC filing. They don’t give you strategy. They don’t tell you whether you should be an S-Corp or stay an LLC. They don’t help you understand the tax implications. It’s like buying a car without an engine and being surprised when it doesn’t run.

My Honest Advice After Over Two Decades in This Business

Don’t rush this decision. I’ve seen too many Gainesville business owners switch to S-Corp because someone at a networking event told them it would save taxes, only to regret it six months later when they’re drowning in payroll paperwork and quarterly filings.

Start as an LLC. Keep it simple while you’re building. Track your profit every month. When you have a full year of solid, consistent profit over $60,000 to $80,000, that’s when you call someone like me and we run the actual numbers to see if S-Corp status makes sense for your specific situation.

And please, talk to a tax professional before you make the switch. This is not a DIY decision. The IRS has very specific rules about reasonable salary, distribution timing, and shareholder requirements. Get it wrong and you’ll owe back taxes and penalties that wipe out any savings you thought you were getting.

Not Sure Which Structure is Right for You?

At LMN Tax, we help Northern Virginia business owners make this exact decision. We’re a digital first firm based in Manassas (by appointment only), working with everyone from 7-Eleven franchise owners to Bethesda doctors to Bristow tech consultants. We’ll look at your income, your industry, your goals, and run the actual numbers to show you what you’d save or lose with each option.

Call us at (571) 326-7900 or schedule a business structure consultation through lmntax.com. We’ll help you figure out the right path forward. And if you decide to make the switch, we handle the payroll, bookkeeping, and tax filing so you don’t have to worry about it.

IRS Resources & References

Reasonable Compensation: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

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