S-Corp vs LLC
S-Corp vs LLC compared for small business owners. Save on self-employment taxes or keep it simple? See which entity type fits your business in 2026.
Side-by-Side Comparison
S-Corp
- +Save on self-employment taxes — pay yourself a reasonable salary, take rest as distributions
- +Tax savings can be $5K-$20K+ annually for profitable businesses
- +Pass-through taxation — no double taxation
- +Credibility with clients and lenders
- +Can elect S-Corp status for an existing LLC
- -Payroll requirements — must run payroll for yourself
- -Reasonable salary rules — IRS scrutinizes if salary is too low
- -More paperwork — quarterly payroll filings, annual tax returns
- -Ownership restrictions — max 100 shareholders, US citizens only
Best For
Profitable businesses earning $50K+ annually after expenses, consultants, and freelancers saving on self-employment tax.
LLC
- +Simplest entity to form and maintain
- +Flexible taxation — choose pass-through or corporate
- +Liability protection — personal assets shielded
- +No ownership restrictions — any number of members, foreign OK
- +Operating agreement customizes management structure
- -Self-employment tax on ALL profits (15.3% up to $168,600)
- -No self-employment tax savings like S-Corp
- -State fees vary — some states charge annual franchise taxes
- -LLC protections can be pierced if commingling funds
Best For
New businesses just starting out, side hustles, real estate holdings, and businesses earning under $50K/year.
| Feature | S-Corp | LLC |
|---|---|---|
| Top Advantage | Save on self-employment taxes — pay yourself a reasonable salary, take rest as distributions | Simplest entity to form and maintain |
| Biggest Drawback | Payroll requirements — must run payroll for yourself | Self-employment tax on ALL profits (15.3% up to $168,600) |
| Best For | Profitable businesses earning $50K+ annually after expenses, consultants, and freelancers saving on self-employment tax. | New businesses just starting out, side hustles, real estate holdings, and businesses earning under $50K/year. |
Glen's Verdict
Former hedge fund manager, current index fund enthusiast
Start as an LLC, elect S-Corp when profitable. I run Cloud Nimbus LLC and this is exactly what I did. When you're earning $30K from freelancing, the S-Corp paperwork isn't worth the tax savings. When you're earning $150K? An S-Corp election saves you $10K+ per year in self-employment taxes. The break-even is roughly $40-60K in net profit — below that, stay LLC. Above that, talk to a CPA about the S-Corp election. And get a CPA. This is not DIY territory.
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Frequently Asked Questions
Which is better, S-Corp or LLC?
It depends on your situation. S-Corp is best for: Profitable businesses earning $50K+ annually after expenses, consultants, and freelancers saving on self-employment tax. LLC is best for: New businesses just starting out, side hustles, real estate holdings, and businesses earning under $50K/year.
What are the main differences between S-Corp and LLC?
The key differences come down to their strengths. S-Corp advantages include save on self-employment taxes — pay yourself a reasonable salary, take rest as distributions and tax savings can be $5k-$20k+ annually for profitable businesses. LLC advantages include simplest entity to form and maintain and flexible taxation — choose pass-through or corporate.
Can I have both S-Corp and LLC?
In many cases, yes. Having both can provide diversification and flexibility. Evaluate your specific needs, goals, and eligibility requirements to determine if using both makes sense for your situation.
What are the downsides of S-Corp?
Payroll requirements — must run payroll for yourself Reasonable salary rules — IRS scrutinizes if salary is too low More paperwork — quarterly payroll filings, annual tax returns Ownership restrictions — max 100 shareholders, US citizens only
What are the downsides of LLC?
Self-employment tax on ALL profits (15.3% up to $168,600) No self-employment tax savings like S-Corp State fees vary — some states charge annual franchise taxes LLC protections can be pierced if commingling funds
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