2026 Business Entity Guide
S Corp vs LLC
The entity you choose determines how much you pay in taxes, how much paperwork you deal with, and whether the IRS leaves you alone. Here's the real breakdown.
Written by Glen Bradford — Purdue engineer, former hedge fund manager, and owner of Cloud Nimbus LLC.
15.3%
SE tax rate LLCs pay on all profit
$9K+
Annual savings at $150K with S-Corp
$50K
Profit threshold to consider S-Corp
100
Max shareholders allowed in S-Corp
What's Inside
Side-by-Side Comparison
Formation
File Articles of Organization with your state. Simple, often online. $50-$500 depending on state.
Form an LLC or corporation first, then file Form 2553 with the IRS to elect S-Corp status. Two-step process.
Taxation (Default)
Pass-through: All profit flows to your personal return (Schedule C for single-member). No entity-level tax.
Pass-through: Profit flows to personal return via Schedule K-1. Must file Form 1120-S. No entity-level tax.
Self-Employment Tax
ALL net profit subject to 15.3% SE tax (12.4% Social Security + 2.9% Medicare). The big pain point.
Only your W-2 salary is subject to FICA. Distributions above salary are NOT subject to SE tax. This is where the savings happen.
Ownership Rules
No restrictions. Any number of members, foreign owners, other entities as members. Maximum flexibility.
Max 100 shareholders. U.S. citizens/residents only. One class of stock. No corporate or partnership shareholders.
Liability Protection
Strong personal liability protection. Members not personally liable for business debts (with proper formalities).
Same strong liability protection. Shareholders not personally liable for corporate debts.
Annual Requirements
Minimal. Annual report in most states ($0-$300). No required meetings or minutes.
Quarterly payroll filings, W-2s, Form 1120-S, reasonable salary documentation. Significantly more paperwork.
Cost to Maintain
State annual fees only. A CPA might charge $300-$800 for your return.
Payroll service ($30-$60/month), S-Corp tax return ($800-$1,500), payroll tax filings. $1,500-$3,000+/year in admin costs.
Profit Distribution
Flexible. Can split profits any way members agree, regardless of ownership percentage.
Must distribute proportionally to ownership. One class of stock means one distribution ratio.
Score: LLC wins 5 categories, S-Corp wins 1, and 2 are ties. The LLC is simpler and more flexible. The S-Corp's single advantage — SE tax savings — is so powerful it justifies the extra complexity once you're making enough money.
The Self-Employment Tax Savings
LLC (Default)
You pay 15.3% on all net profit. Every dollar above expenses gets hit with SE tax. Make $150K → ~$21,195 in SE tax alone.
S-Corp
Pay yourself a "reasonable salary" via W-2 payroll. Only that salary pays FICA (15.3%). Everything above comes as a distribution — no SE tax.
Worked Example: $150K Net Income
LLC Route
- Net income$150,000
- SE tax base (92.35%)$138,525
- Social Security (12.4%)$17,177
- Medicare (2.9%)$4,017
- Total SE Tax~$21,195
S-Corp Route
- Net income$150,000
- Reasonable salary (W-2)$80,000
- FICA on salary (15.3%)$12,240
- Distribution (no SE tax)$70,000
- Total FICA~$12,240
Annual Savings: ~$8,955
That's $745/month back in your pocket. Over 10 years, nearly $90,000 saved.
SE Tax Savings at Every Income Level
| Net Income | Reasonable Salary | LLC SE Tax | S-Corp FICA | Annual Savings |
|---|---|---|---|---|
| $75,000 | $50,000 | $10,598 | $7,650 | $2,948 |
| $100,000 | $60,000 | $14,130 | $9,180 | $4,950 |
| $150,000 | $80,000 | $21,195 | $12,240 | $8,955 |
| $200,000 | $95,000 | $28,260 | $14,535 | $13,725 |
| $300,000 | $120,000 | $39,948 | $18,360 | $21,588 |
* 2025 FICA rates: 12.4% SS (up to $168,600 wage base) + 2.9% Medicare. LLC SE tax on 92.35% of net profit per IRS rules.
When to Choose an LLC
You Want Simplicity
No payroll, no corporate tax return, no reasonable salary headaches. File Schedule C and move on. The 40+ hours/year an S-Corp requires in extra admin is real.
Solo or Side Hustle
If you're a solo freelancer or running a side business alongside a W-2 job, the LLC is the default. Less overhead, less IRS risk, and you're already paying FICA on your day job.
Rental Properties
Rental income is passive — not subject to SE tax regardless of entity. An LLC gives liability protection without S-Corp overhead. Use a separate LLC for each property.
Under $50K Profit
The math doesn't work below $50K. S-Corp admin costs of $1,500-$3,000/year plus payroll hassle can exceed the SE tax savings. Stay simple until the numbers justify the switch.
Passive Income Streams
Book royalties, course sales, affiliate income — if you're not actively performing services, the S-Corp election adds complexity without proportional savings.
Multiple Owners with Unequal Splits
LLCs allow flexible profit sharing regardless of ownership %. Two partners can split 50/50 ownership but 70/30 profits. S-Corps cannot — distributions must match stock ownership.
When to Choose an S-Corp
Active Business with $50K+ Profit
You're actively performing services (consulting, freelancing, running a business) and clearing $50K+ net profit. SE tax savings now meaningfully exceed admin costs.
You Want to Reduce SE Tax
If your Schedule SE makes you sick, the S-Corp is the fix. At $150K net income, you're saving ~$9K/year. Invest those savings and you're looking at $150K+ over a decade.
You're Willing to Do Payroll
S-Corp means payroll. Period. Quarterly filings, W-2s, state unemployment, workers' comp. Services like Gusto ($40-$60/month) make it manageable, but you must commit.
Professional Services Firms
Consultants, developers, accountants, lawyers — anyone billing $100+/hour for expertise. High-margin service businesses benefit most from the salary/distribution split.
Planning for Growth
If you plan to hire employees, the S-Corp already has payroll infrastructure. Adding employees is simpler when you're already running payroll for yourself.
You Have a Good CPA
A CPA who understands S-Corps is non-negotiable. They'll set your salary, handle the 1120-S, optimize quarterly payments, and keep you out of IRS trouble. Budget $1,000-$1,500/year.
The "Reasonable Salary" Trap
The IRS knows exactly what S-Corp owners are doing — minimizing salary to maximize distributions. They've been cracking down for years. Here's what they look at.
The Watson Case: What NOT to Do
In Watson v. Commissioner (2012), an Iowa CPA ran his firm as an S-Corp. Revenue: $203,651. Salary: just $24,000. The Tax Court reclassified $67,044 in distributions as wages — costing back taxes, penalties, and interest. The IRS uses this case as a benchmark. Don't be Watson.
Industry Comparable Pay
What would you earn as an employee doing the same work? The IRS uses BLS data, Glassdoor, and industry surveys. If a Salesforce consultant earns $120K as an employee, paying yourself $40K is a red flag.
Training & Experience
Years of experience, certifications, and specialized skills increase what counts as reasonable. A 15-year veteran commands a higher reasonable salary than someone with 2 years.
Hours Worked
If you work 50 hours a week, your salary should reflect that. Part-time owners can justify lower salaries. Full-time owners cannot pay themselves $30K.
Revenue & Profit History
Your salary as a percentage of total revenue matters. The IRS gets suspicious when salary is less than 30-40% of net profit. A $300K business paying $50K salary is begging for an audit.
Location
Cost of living adjustments matter. A reasonable salary in San Francisco differs from one in rural Arkansas. The IRS considers geographic pay differences.
Distributions vs. Salary Ratio
Taking $200K in distributions and $40K in salary is the pattern the IRS specifically targets. A 60/40 salary-to-distribution split is generally safer than 20/80.
Safe Harbor Guidelines
- 1. Document your salary determination annually with comparable pay data.
- 2. Use salary surveys from BLS, Glassdoor, Salary.com, or your professional association.
- 3. Keep salary at 40-60% of net profit minimum. Below 30% is a red flag.
- 4. Adjust salary annually as the business grows. Static salary + growing distributions gets noticed.
- 5. Have your CPA write a reasonable compensation analysis memo for your files.
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LLC Taxed as S-Corp: The Best of Both Worlds
The move most CPAs recommend: form an LLC, then elect S-Corp tax treatment by filing IRS Form 2553. Keep the LLC's legal simplicity while getting S-Corp taxation.
Step 1: Form LLC
File Articles of Organization. Get your EIN. Set up operating agreement and business bank account.
Step 2: File Form 2553
Submit within 75 days of formation or by March 15 for the current tax year. Late elections possible with reasonable cause.
Step 3: Run Payroll
Set up Gusto/ADP/QuickBooks. Pay yourself a reasonable salary via W-2. Take remaining profit as distributions.
Why This Beats Forming a Corporation
- + No corporate formalities (board meetings, minutes, resolutions)
- + Flexible membership structure — easier to add/remove members
- + Can revoke S-Corp election and revert to default LLC taxation anytime
- + Charging order protection in most states (stronger than corporate shares)
- + Operating agreement is more flexible than corporate bylaws
When to revoke: If profit drops below $40K, admin costs outweigh savings. Revoke the S-Corp election and go back to standard LLC taxation. Requires consent of shareholders holding >50% of shares; effective at the start of the following tax year.
Glen's Take
Glen Bradford
Owner, Cloud Nimbus LLC · Salesforce Consultant
I've been both. I run Cloud Nimbus LLC — a Salesforce consulting company based in Miami Beach. Here's my honest take after years of dealing with both structures.
The LLC is simpler. No payroll headaches, no quarterly 941 filings, no arguing with the IRS about whether my salary is "reasonable." I file my Schedule C, take the QBI deduction, and move on.
The S-Corp saves real money once you're making $80K+. At that level, SE tax savings clearly exceed accounting costs, payroll fees, and compliance time. The crossover depends on your CPA's fees and your tolerance for admin.
My advice: Start as an LLC. Keep it simple. Focus on growing revenue. When you consistently clear $60K-$80K in net profit, talk to your CPA about electing S-Corp status. Don't switch for a business that might earn $50K one year and $30K the next — admin costs eat you alive in down years.
One more thing: the QBI deduction (Section 199A) gives LLCs and S-Corps a 20% deduction on qualified business income. This already reduces your effective tax rate significantly. Factor that into your comparison — the S-Corp's SE tax savings are on top of the QBI deduction both entities already get.
The biggest mistake I see? Switching too early because of an article about tax savings, then spending $3K/year on compliance for a business that only nets $40K. Do the math. Talk to a CPA who runs the numbers for your situation — not a generic article.
Quick Decision Framework
Is your net profit consistently above $60K?
No → Stay LLC. Savings don't justify the complexity yet.
Are you actively performing services (not passive income)?
No → Stay LLC. Passive income isn't subject to SE tax anyway.
Are you willing to run payroll and file extra tax forms?
No → Stay LLC. S-Corp requires ongoing admin commitment.
Do you have a CPA experienced with S-Corps?
No → Find one first. A bad setup costs more than the savings.
Yes to all four?
Go for it → Elect S-Corp status. File Form 2553 and start saving.
Frequently Asked Questions
What is the main difference between an S Corp and an LLC?
The main difference is how they handle self-employment tax. An LLC pays 15.3% self-employment tax on ALL net profit. An S-Corp only pays FICA taxes on the owner's W-2 salary — distributions above that salary are not subject to self-employment tax. This can save thousands per year for profitable businesses. Both offer pass-through taxation and liability protection.
At what income level should I switch from LLC to S Corp?
The general rule of thumb is $50,000-$60,000 in net profit. Below that, the S-Corp's administrative costs (payroll service, separate tax return, bookkeeping) eat into or exceed the SE tax savings. The breakeven is usually around $40K-$60K depending on your state and CPA costs.
Can an LLC be taxed as an S Corp?
Yes — this is the most common approach. You form an LLC for liability protection, then file IRS Form 2553 to elect S-Corp tax treatment. You get the simplicity of an LLC with the tax savings of an S-Corp. The LLC maintains its legal structure while being taxed as an S-Corp.
What is a reasonable salary for an S Corp owner?
A reasonable salary must reflect what you would earn doing the same work as an employee. The IRS considers industry pay data, your experience, hours worked, geographic location, and the company's revenue. As a guideline, salary should be at least 40-60% of net profit for active owners.
What happens if the IRS audits my S Corp salary?
If the IRS determines your salary is unreasonably low, they will reclassify distributions as wages. You'll owe back payroll taxes (employer and employee shares), penalties up to 100% of unpaid taxes, plus interest. In Watson v. Commissioner (2012), an accountant paid himself $24K on $203K of income and lost.
Do S Corps have to run payroll?
Yes — if you work in the business, you MUST be on payroll and receive a W-2. This means quarterly payroll tax filings (Forms 941), annual W-2 and W-3 filings, state payroll taxes, and often state unemployment insurance. Most owners use Gusto, ADP, or QuickBooks Payroll ($30-$60/month).
Can I have an S Corp with just myself?
Yes — a single-shareholder S-Corp is extremely common. You'd be the sole shareholder, director, officer, and employee. Pay yourself a reasonable salary via payroll, then take additional profit as distributions. This is the standard setup for consultants making over $50K in profit.
Is an S Corp or LLC better for rental properties?
An LLC is almost always better. Rental income is passive and NOT subject to self-employment tax — so the S-Corp's main advantage doesn't apply. An LLC gives you liability protection without the payroll headache. Use separate LLCs for each property.
State-by-State Considerations
States That Tax S-Corps Separately
California charges a 1.5% tax on S-Corp net income (minimum $800/year). New York City has its own S-Corp tax. Illinois taxes S-Corp income at 1.5%. These state-level taxes reduce your S-Corp savings and shift the breakeven point higher.
States With No Income Tax
Florida, Texas, Nevada, Wyoming, Washington, and others have no state income tax. In these states, the S-Corp vs LLC decision is purely a federal tax question. Florida (where I am) makes the S-Corp math straightforward — no state-level complications.
Franchise Tax States
Texas charges a franchise tax on both LLCs and S-Corps (0.375-0.75% of revenue over $2.47M). Delaware charges $300/year for LLCs but S-Corps pay based on authorized shares. Know your state's franchise tax before choosing.
Where to Incorporate
Form your LLC in the state where you do business. Forming in Delaware or Wyoming for a single-member LLC just means you pay fees in two states. The Delaware advantage only matters for large corporations raising venture capital or planning an IPO — not for a consulting LLC.
Recommended Resources
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