Tax Benefits of LLCs vs. S Corps – Which One Saves You More?
When starting a business, one of the biggest financial decisions you’ll make is choosing the right entity structure. Two of the most popular options are Limited Liability Companies (LLCs) and S Corporations (S Corps). While both offer liability protection, their tax treatment can significantly impact how much you keep in your pocket. Let’s break down the key differences and which one might be the better fit for your business.
1. How LLCs and S Corps Are Taxed
LLC Taxation
- By default, LLCs are taxed as pass-through entities—meaning profits flow directly to the owners’ personal tax returns.
- Single-member LLCs are taxed like sole proprietors (Schedule C).
- Multi-member LLCs are taxed like partnerships (Form 1065).
- LLC owners must pay self-employment taxes (15.3%) on all net profits.
S Corp Taxation
- S Corps are also pass-through entities, but with one major difference:
- Owners can pay themselves a “reasonable salary” and take remaining profits as distributions, which are not subject to self-employment tax.
- S Corps file Form 1120S and issue K-1s to owners for reporting income.
2. Key Tax Savings of an S Corp
One of the biggest advantages of an S Corp over an LLC is the ability to reduce self-employment taxes.
Example:
- LLC Owner (No S Corp Election) makes $100,000 and pays $15,300 in self-employment taxes.
- S Corp Owner takes a $30,000 salary and $70,000 in distributions. They only pay self-employment taxes on the salary—saving $10,710 in taxes.
This strategy is what makes S Corps a powerful tool for small business owners looking to lower their tax liability.
3. Costs & Compliance Differences
LLCs are easier and cheaper to maintain
- Fewer administrative requirements
- No payroll setup needed
- Flexible profit distributions
S Corps require more formalities
- Must run payroll for owners (W-2 reporting)
- Requires annual corporate minutes & meetings
- Stricter IRS rules on “reasonable compensation”
For small businesses making under $40K in profits, the compliance costs of an S Corp may not be worth it.
4. Which One Is Best for You?
LLC is better if:
You’re a small business or freelancer making less than $40K/year in profits. You want simplicity with fewer compliance costs. You don’t mind paying self-employment tax.
S Corp is better if: You’re making at least $50K+ in annual profits. You want to reduce self-employment taxes. You’re comfortable with payroll and IRS reporting.
Final Thoughts
Choosing between an LLC and an S Corp depends on how much you earn and how much you want to save on taxes. If your business is profitable, an S Corp could save you thousands in taxes each year. But if you’re just starting out, an LLC offers simplicity and flexibility.
Not sure which one is right for you? Book a call with Taxfully to discuss your best tax strategy!
