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LLC vs. S Corp: What’s the Difference?

Not all LLCs are created equal. Choosing between a default LLC and electing S corporation (S corp) status can significantly impact your taxes. Let’s compare the two structures.

Sole Proprietorship LLC (Default)

  • Files taxes on Schedule C.
  • Pays 15.3% self-employment tax on all profits.
  • Simple setup, minimal paperwork.

S Corporation Election

  • Requires filing Form 2553 with the IRS.
  • Pay yourself a reasonable salary (W-2) and take additional profits as distributions.
  • Distributions avoid self-employment tax, saving you money.

Example: Tax Savings Breakdown

Mike runs an IT business that nets $200,000 annually. Here’s how the tax impact changes:

  • As a default LLC: Pays $30,600 in self-employment tax.
  • As an S Corp: Pays himself a $100,000 salary (taxed at $15,300 in self-employment tax). The other $100,000 is taken as distributions (no SE tax). Savings: $15,300!

But Beware: S Corps Have Extra Requirements

  • You must run payroll (costs around $500/year).
  • Additional annual filings and compliance are required.

Conclusion

If your business is profitable, electing S corp status could significantly reduce your tax burden. However, it comes with added responsibilities.

Thinking about switching to an S corp? Call Guerrero CPA at 210-490-7100—we’ll handle the paperwork and ensure compliance.