LLC vs. S-Corp: Which Is Right for Your Business? (2026 Guide)
This is one of the questions I get asked most, and it's usually asked slightly wrong. People come to me and say, "Should I be an LLC or an S-Corp?" as if those are two doors and they have to pick one. They aren't. An LLC is a legal structure you set up with the state. An S-Corp is a tax election you make with the IRS. A lot of my clients end up being both, an LLC that's chosen to be taxed as an S-Corp. Whether that election is right for you comes down mostly to how much your business earns and whether the tax savings are worth the extra work.
That's the short answer. Let me walk you through the rest, because the details are where people either save real money or make an expensive mistake.
They're not two options on the same menu
The confusion I see most often is treating "LLC" and "S-Corp" like two sizes of the same thing. They're not even the same kind of thing.
An LLC, a limited liability company, is a legal entity. In Virginia you set one up by filing with the State Corporation Commission. What it does is separate your personal life from your business. If the business gets sued or runs up a debt, your house and your personal savings are generally protected. That protection is the whole reason to form an LLC in the first place, and for a lot of my clients it's reason enough on its own.
An S-Corp isn't an entity at all. It's a tax status. You get it by filing Form 2553 with the IRS, which tells them to tax your business under Subchapter S of the tax code. You can't just be an S-Corp on its own. You have to have an entity first, an LLC or a corporation, and then elect S-Corp taxation on top of it.
So when someone asks me "LLC or S-Corp," what they're really asking is, "I have an LLC, or I'm about to start one, should I have it taxed as an S-Corp?" That's the question worth slowing down for, because that's where the money is.
How an LLC is taxed when you don't do anything
When you form an LLC and leave it at that, the IRS taxes it the simple way. If you're the only owner, it's taxed like a sole proprietorship. If there are several owners, it's taxed like a partnership. Either way, the profit passes through to your personal tax return and you pay regular income tax on it.
You also pay self-employment tax on all of that profit, and this is the part that surprises people. Self-employment tax is how those of us who work for ourselves pay into Social Security and Medicare. When you have a regular job, you and your employer split that bill. When you work for yourself, you're both halves, so you pay the whole thing. For 2026, that rate is 15.3%. It breaks down into 12.4% for Social Security, which applies to the first $184,500 you earn, and 2.9% for Medicare, which applies to everything, with a little more on higher incomes.
Here's what I want you to notice. As a plain LLC, you pay that 15.3% on every dollar of profit, up to that Social Security limit. That's the exact thing the S-Corp election is built to change.
What changes when you elect S-Corp
When your LLC elects to be taxed as an S-Corp, your income splits into two parts.
- The first part is your salary. As an S-Corp owner who works in the business, you become an employee of your own company, and you pay yourself a real wage through payroll services. That salary gets the same payroll taxes as any job, which come out to about 15.3% combined.
- The second part is the profit left after your salary and other business expenses. That profit passes through to your personal tax return and is subject to income tax whether you leave the money in the business or take it out. When you do take cash out beyond your salary, that's generally a distribution. The key tax benefit is that the remaining S-Corp profit is generally not subject to self-employment tax the way profit from a sole proprietorship or plain single-member LLC is.
Here's an important distinction I make sure my clients understand. An S-Corp does not mean you're only taxed on your salary and the distributions you take. The business's taxable profit still flows through to your personal return. The tax savings come from reducing the amount subject to Social Security and Medicare taxes, not from making the remaining profit disappear from your taxable income.
How much that actually saves you depends entirely on your own numbers, your salary, your total income, all of it. I don't put a figure on it until I've looked at a real situation, because a general number is how people talk themselves into the wrong decision. This is worth doing the math on for your specific business, not a rule of thumb from the internet.
The catch nobody mentions until it's a problem
If that's sounding a little too good, here's the guardrail. The IRS requires S-Corp owners who work in the business to pay themselves a reasonable salary before they take any distributions. You cannot pay yourself a tiny salary and scoop the rest out as a distribution to dodge payroll tax. The IRS is very familiar with that move, and officer pay is one of the things they actively audit.
"Reasonable" means what you'd have to pay someone else to do your job. There's no magic percentage and no safe-harbor number, no matter what you read online. It depends on your role, your industry, your experience, and what similar work pays around here. If the IRS decides you paid yourself too little, they can turn your distributions back into wages and add back payroll taxes, interest, and penalties. When these cases go to court, they usually go the IRS's way.
This is honestly the part where having someone in your corner earns its keep. A big piece of what I do for S-Corp clients is set a salary that holds up and document why it holds up, so a good tax preparation strategy doesn't turn into an audit letter down the road. I've seen plenty of business owners who set themselves up without getting this part right, and I've cleaned up after other places that badly mishandled the bookkeeping. Straightening that out afterward costs more than doing it right the first time.
When the S-Corp election is actually worth it
The election isn't free. It means running payroll, filing a separate business return (Form 1120-S), issuing yourself a W-2, and generally more bookkeeping and more compliance, every single year. Those costs don't go away.
So it's worth it when the self-employment tax savings clearly beat those added costs. Where that line falls is different for every business, because it depends on your profit, the salary you'd reasonably pay yourself, and what the extra payroll and filing work runs you. If your profit is still modest, those costs can eat the savings and the headache isn't worth it. As your profit grows, the savings grow with it. I'd rather run your actual numbers than hand you a threshold, because I've watched people elect too early, drown in the extra overhead, and wonder why they didn't come out ahead.
A couple of other things matter too:
- Ownership limits: An S-Corp has rules about who can own it: 100 shareholders or fewer, all of them U.S. citizens or residents, and only one class of stock. If you're picturing outside investors down the road, those limits can get in the way.
- The Deadline: To have the election count for a given tax year, Form 2553 generally has to be filed by about two months and 15 days into that year. For the 2026 tax year, that date was March 16, 2026. Miss it and the election usually waits until the next year, though the IRS does allow late relief in some cases if you have a good reason.
So which one should you be?
If you're just getting started, or your profit is still on the smaller side, a plain LLC is often exactly right. You get the liability protection, your taxes stay simple, and you skip the payroll and filing overhead. Plenty of my clients run as LLCs for years and are perfectly happy.
Once your business is consistently profitable, the S-Corp election starts to pull its weight. I generally start looking at the numbers once a business is consistently making around $60,000 in profit. That isn't a magic number, and it doesn't mean an S-Corp automatically makes sense at $60,000. The break-even point depends on what a reasonable salary would be for the owner, the cost of payroll and tax preparation, and the owner's overall tax situation. But around $60,000 in consistent profit is usually where I think it's worth running the numbers. Above that, the self-employment tax savings can start to outrun the extra cost, and the more profit you take as distributions above a fair salary, the more it works in your favor.
The honest truth is that this is a numbers question, and the numbers are yours alone. Your profit, your salary, your plans, the cost of the extra compliance, they all go into it. Get it right and it saves you real money. Get it wrong, either by jumping too soon or by setting a salary that won't hold up, and it can cost you more than it saves. That's the kind of decision I'd rather you make with someone looking at your real situation than off a blog post, even this one. Helping business owners work through exactly this is part of our new business setup services, and if you're already up and running, our tax preparation and payroll services cover what the S-Corp election asks of you going forward.
If you're weighing this right now, call me. I'd rather have a fifteen-minute conversation about your actual numbers than have you guess.
Frequently Asked Questions
Is an LLC or an S-Corp better for a small business? Neither is automatically better, because they aren't the same kind of thing. An LLC is a legal structure that protects your personal assets. An S-Corp is a tax election you can put on top of an LLC. For a business with modest profit, a plain LLC is often simpler and less costly to run. For a consistently profitable one, electing S-Corp taxation on an LLC can lower self-employment tax.
Can an LLC be taxed as an S-Corp? Yes, and it's the most common setup I see for small businesses. You keep your LLC as the legal entity and file IRS Form 2553 to have it taxed as an S-Corp. Your legal structure stays an LLC. Only the federal tax treatment changes.
How much money do you need to make before an S-Corp is worth it? I generally start looking at the numbers once a business is consistently making around $60,000 in profit. That isn't a magic number, and it doesn't mean an S-Corp automatically makes sense at $60,000. The break-even point depends on what a reasonable salary would be for the owner, the cost of payroll and tax preparation, and the owner's overall tax situation.
What is a reasonable salary for an S-Corp owner? It's what you'd have to pay someone else to do your job, based on your role, industry, experience, and local pay. The IRS doesn't publish a set percentage or safe-harbor amount. Paying yourself an unreasonably low salary to take bigger distributions is a common audit trigger, and the IRS can reclassify those distributions as wages, with penalties, if the salary won't hold up.
What is the deadline to elect S-Corp status? Form 2553 generally has to be filed by two months and 15 days into the tax year you want it to apply to. For the 2026 tax year, that was March 16, 2026. Miss it and the election usually takes effect the following year, though late relief is available in some cases if you have reasonable cause.
Do I have to run payroll if I elect S-Corp status? Yes. An S-Corp owner who works in the business has to be paid a reasonable salary through real payroll, with W-2 wages and payroll tax filings, even if you're the only person in the company. That payroll requirement is one of the costs to weigh against the tax savings.
About the Author
Written by Lisa Hamlin, owner of Book It Accounting LLC. Lisa holds a B.S. in Forensic Accounting and works with small businesses on entity setup, bookkeeping, tax preparation, and payroll. Our firm provides full-service accounting with a forensic accuracy standard, catching the errors others miss.
Disclaimer: This article is general information, not tax advice for your specific situation. The right choice depends on your numbers, so let's talk it through before you file.