LLC vs S-Corp: The Decision That Could Save You Thousands.
Most business owners are overpaying taxes because they're in the wrong entity structure. One IRS form could change that.
A guide by Taxstra Tax & Accounting — CPA-led tax strategy for business owners
The Short Answer
If your net business profit exceeds $50,000 per year, an S-Corp election could save you $5,000–$30,000 annually in self-employment tax. Below that, the compliance costs usually outweigh the savings. But the real answer depends on your specific situation.
Side-by-Side Comparison
Sole proprietorship, LLC, and S-Corp across eight key factors.
| Feature | Sole Prop | LLC (Default) | S-Corp |
|---|---|---|---|
| Legal Protection | None | Yes | Yes |
| Self-Employment Tax | 15.3% on ALL profit | 15.3% on ALL profit | Only on salary |
| Tax Return Filed | Schedule C | Schedule C | Form 1120-S + K-1 |
| Payroll Required | No | No | Yes |
| Annual Compliance Cost | ~$0 | $0–$500/yr | $2,000–$5,000/yr |
| Best For | Side hustles <$40K | Under $50K profit | Over $50K profit |
| QBI Deduction (23%) | Yes | Yes | Yes |
| Retirement Plans | SEP IRA | SEP IRA | Solo 401(k) + match |
How S-Corp Saves Money
A real example with $150,000 in net business profit.
As an LLC
As an S-Corp
Annual Savings
$13,770
Minus ~$3,000 in S-Corp compliance costs = ~$10,770 net savings per year
Figures are illustrative. Actual savings depend on your specific situation and reasonable compensation analysis. The $60,000 salary shown is hypothetical.
When to Stay an LLC
The S-Corp is not the right choice for everyone. These situations call for keeping your default LLC taxation.
Net profit under $40K–$50K — the compliance costs outweigh the tax savings
Planning to raise VC funding — investors prefer C-Corps for convertible notes and preferred stock
You have foreign (non-US) shareholders — S-Corps can't have them
You hold rental real estate — never put appreciating property in an S-Corp (triggers deemed sale on exit)
More than 100 shareholders — S-Corps have a 100-shareholder limit
When to Elect S-Corp
These conditions signal that an S-Corp election is likely worth it.
Net profit consistently over $50K — the savings are real and compounding
No plans for outside investment — you're bootstrapping and self-funded
Willing to run payroll — or have your CPA handle it (like us)
Want to maximize retirement contributions — S-Corp enables employer match in Solo 401(k)
Ready to treat your business like a real business — separate bank accounts, clean books, formal structure
The Election Process
Five steps from LLC formation to your first S-Corp payroll run.
Form Your LLC
File articles of organization with your state. This creates your legal entity.
Get an EIN
Apply for an Employer Identification Number from the IRS (free, takes 5 minutes online).
File Form 2553
Submit your S-Corp election to the IRS. Due by March 15 for the current tax year.
Set Up Payroll
Begin paying yourself a reasonable salary via W-2. We use ADP for seamless processing.
File Form 1120-S Annually
Your S-Corp files its own tax return and issues K-1s to shareholders.
5 Mistakes That Cost Thousands
We see these errors with newly elected S-Corps more than anything else.
Paying Yourself $0 Salary
The #1 S-Corp audit trigger. The IRS requires reasonable compensation for owners who perform services.
Setting Salary Too Low
Without proper documentation (like RC Reports), the IRS can reclassify your distributions as wages — plus penalties.
Missing Form 2553 Deadline
If you don't file by March 15, you may have to wait until the next tax year. Late relief exists but isn't guaranteed.
Putting Real Estate in an S-Corp
Moving property out of an S-Corp triggers a deemed sale. You'll pay tax on all appreciation. Use a separate LLC.
Ignoring Corporate Formalities
The IRS can pierce the S-Corp election if you don't maintain separate bank accounts, meeting minutes, and proper records.
Related Resources
S-Corp Savings Calculator
See exactly how much you'd save by electing S-Corp.
Sole Proprietorship vs. S-Corp
Side-by-side tax comparison at every income level.
Advanced S-Corp Strategies
Go beyond the basics with Accountable Plans, QBI, and more.
Reasonable Compensation
How to set your salary to satisfy the IRS.
Late S-Corp Election
Missed the deadline? Relief may still be available.
Monthly Accounting
Keep your S-Corp books clean and tax-ready.
LLC Tax Filing Guide
How single-member and multi-member LLCs are taxed by default and by election.
LLC vs LLP
When a limited liability partnership makes more sense than an LLC.
Frequently Asked Questions
Not Sure? We'll Run the Numbers for You.
Book a free 30-minute strategy call. We'll analyze your specific situation and tell you exactly how much an S-Corp election would save — or if staying as an LLC is the better move.
Find Out What You're Overpaying in Taxes
Book a free 30-minute call to walk through your situation. We'll tell you exactly how our CPA-led team can help — and whether we're the right fit.