Entity Guidance
S-Corp vs LLC: which structure fits your business?
For many small businesses, electing S-Corporation status can reduce self-employment tax. But it also adds payroll, filings, and administrative overhead. Here's how the two compare.
For educational purposes only. This page describes general tax concepts and does not account for state taxes, deductions, credits, or your full financial picture. Always consult a qualified tax professional before making entity decisions.
Side-by-side
LLC vs S-Corporation
| Topic | LLC (Sole Proprietorship default) | S-Corporation |
|---|---|---|
| Self-employment tax | All net profit is subject to self-employment tax (Social Security + Medicare). | Only the owner's reasonable salary is subject to payroll tax; distributions are not. |
| Owner compensation | Owner takes draws — no formal payroll required. | Owner must be paid a reasonable salary through payroll before taking distributions. |
| Administrative overhead | Simpler filings and recordkeeping. | Requires payroll, an S-election, and separate corporate tax return (Form 1120-S). |
| Best fit | Newer businesses, side businesses, or those with modest net profit. | Established businesses with consistent net profit high enough to justify payroll costs. |
How to think about it
When does the S-Corp election make sense?
Profit level
The tax savings only work if net profit comfortably exceeds a reasonable salary — plus the added cost of payroll, filings, and bookkeeping.
Reasonable salary
As an S-Corp owner-employee you must pay yourself a reasonable salary for the work you perform before taking distributions. The IRS scrutinizes this.
Operational readiness
Payroll, an S-election, and a separate corporate return are non-negotiable. Make sure the bookkeeping is in place before making the switch.
Ready to make the right choice?
Every business is different. Let JRK Financial run the numbers with your complete financial picture — so you make the entity decision with confidence.