Should I form an LLC or S-Corp?
Updated April 20, 2026 · 10 min read
Start with an LLC. Elect S-Corp status with the IRS once your business profits cleanly exceed $40,000–$60,000 per year. That is the single most useful sentence for 90% of new business owners.
The confusion exists because "LLC" is a legal entity structure and "S-Corp" is a tax classification. An LLC is not an alternative to an S-Corp — an LLC can choose to be taxed as a sole proprietorship, partnership, C-Corp, or S-Corp. The real question is which tax treatment serves you.
Here is the framework attorneys and CPAs actually use to decide.
Why start with an LLC
An LLC gives you:
- Limited liability protection. Your personal assets are shielded from business debts and lawsuits (when you maintain proper separation). - Tax flexibility. You can keep default pass-through taxation or elect S-Corp treatment later with a simple IRS form. - Minimal paperwork. No required annual meetings, no board of directors, no minutes. - Simple startup. $50–$500 state filing fee, one-page Articles of Organization, and you are operational in days.
When the S-Corp election starts to save money
As a single-member LLC taxed by default (sole proprietorship), every dollar of profit is hit with self-employment tax at 15.3% (Social Security + Medicare) on top of your income tax.
As an S-Corp, you pay yourself a "reasonable salary" (subject to the 15.3% payroll tax) and take the rest as distributions, which escape the 15.3%. If your salary is $60,000 and your profit is $100,000, you save 15.3% on the $40,000 distribution — about $6,120 per year.
But S-Corp brings costs: separate payroll (ADP/Gusto, ~$500–$1,200/year), additional tax return (Form 1120-S, $500–$1,500 in CPA fees), and state-level S-Corp taxes (California hits S-Corps with a 1.5% franchise tax on top of the $800 minimum).
Rough breakeven: At $40,000 net profit, the S-Corp election usually starts saving you money net of costs. Below $40,000, stick with default LLC taxation.
What "reasonable salary" actually means
The IRS requires S-Corp owner-employees to pay themselves a salary that matches what someone would earn doing that work for a third-party employer. If you're a freelance consultant making $150,000 profit and paying yourself $20,000 in salary and $130,000 in distributions, that will likely get flagged and reclassified on audit.
A defensible ratio for solo service businesses is typically 40–60% of net profit as salary, with the rest as distributions. Work with a CPA.
When to choose a C-Corp instead
Choose a C-Corp if: you plan to raise venture capital, you plan to offer stock options to employees, or you plan to retain earnings in the business rather than distributing them. C-Corps have double taxation but offer structural advantages for scaling. For most small service businesses, freelancers, consultants, and agencies, a C-Corp is overkill.
Talk to a business attorney if: you have multiple partners or investors, you have complex IP, you're raising capital, or you're in a regulated industry. For simple solo formation, LegalZoom and Rocket Lawyer handle it fine.
Get a Free Case ReviewFrequently Asked Questions
Do I need a lawyer to form an LLC?+
No. You can file directly with your Secretary of State, or use a service like LegalZoom, Rocket Lawyer, or Inc Authority for $0–$300. An attorney is worthwhile if you have multiple partners, complex ownership, or need a customized operating agreement.
In what state should I form my LLC?+
Form it in the state where you physically do business. "Delaware LLC" advice is usually wrong for small businesses — you would still need to register as a foreign entity in your home state, doubling your filings and fees. Delaware makes sense for VC-backed C-Corps, not solo LLCs.
Do I need an operating agreement?+
Yes. Even single-member LLCs should have one. It reinforces the separation between you and the LLC (critical for liability protection) and is often required to open business bank accounts.
When do I file the S-Corp election?+
Form 2553 must be filed within 2 months and 15 days of the start of the tax year you want the election to take effect. Miss the deadline and you are stuck for another year (though late election relief exists).
Do I need an EIN?+
Yes. An Employer Identification Number is free from the IRS and required for nearly every business purpose (bank account, taxes, hiring).
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