Beginner guide · Last reviewed September 24, 2026

LLC vs S Corp, explained like you're new to this.

Two of the most-searched terms in U.S. small-business tax — and one of them isn't even a real structure. This page breaks it down in plain English, without the jargon.

Step 1

What is an LLC?

An LLC is a legal wrapper. You file some paperwork with your state's Secretary of State (cost: $35–$500 one-time), and the state creates a separate legal entity for your business. From that day forward:

· Your personal assets (house, car, savings) are legally separated from your business debts and lawsuits.
· The LLC has its own bank account, can sign contracts, can sue and be sued.
· For federal tax purposes, the IRS ignores the LLC by default. A single-member LLC is taxed as a sole proprietor — meaning you report the business profit on your personal Form 1040 via Schedule C, and pay self-employment tax via Schedule SE.

The key idea: an LLC is a liability shield. It does not, by itself, change your federal income tax.

Step 2

What is an S Corp?

Here's the part that confuses almost everyone: an S Corp is not a separate legal entity. It's a federal tax election. You have to form something first — usually an LLC — then file IRS Form 2553 to "elect S Corp" treatment.

Once elected, the IRS treats your business like this:

· You (the owner) become an employee. You pay yourself a W-2 salary.
· The remaining profit (after the salary) can be taken as a distribution.
· The salary is subject to FICA (the 15.3% payroll tax). The distribution is not.
· You still owe ordinary federal (and state) income tax on both the salary and the distribution.

The key idea: an S-Corp election lets you shield part of your profit from the 15.3% self-employment / FICA tax. It does not eliminate income tax.

Step 3

A $100K example, end to end

Imagine a freelance designer earning $100,000 net profit per year. They compare the default-LLC option to an S-Corp election with a $50,000 salary:

// Default LLC — Schedule SE
seBase      = $100,000 × 0.9235              = $92,350
ssPortion   = min($92,350, $184,500) × 12.4% = $11,451
medicare    = $92,350 × 2.9%                 = $2,678
llcSETax    = $11,451 + $2,678               = $14,129

// S-Corp election — Form 941 (employer-side only)
salary      = $50,000
ssPortion   = min($50,000, $184,500) × 12.4% = $6,200
medicare    = $50,000 × 2.9%                 = $1,450
employerFICA = ($6,200 + $1,450) / 2         = $3,825

// Federal payroll-tax difference
payrollDelta = $14,129 − $3,825              = $10,304

// After $1,200 modeled admin overhead
netBenefit   = $10,304 − $1,200              = $9,104  / year

That's the federal payroll-tax piece. Federal income tax applies to the same earnings on both sides and is not included. State income tax, the QBI deduction, and retirement contributions are also not included. Use thecalculator to model your specific numbers.

Step 4

So which one do I pick?

Three honest rules of thumb:

1. Always form an LLC. The liability protection is worth the $35–$500 one-time fee for almost any real business. Operating as an unprotected sole proprietor exposes your personal assets to every business debt and lawsuit.
2. Don't elect S-Corp until profit justifies it. Below ~$60K/yr net profit, the $1,200 modeled admin overhead usually eats the federal savings. Above ~$60K–$80K, the savings often justify the extra paperwork.
3. Pick the cheaper state if you have a choice. S-Corp math is far better in no-income-tax states (TX, FL, WY, NV, WA, SD, AK, TN). California's $800 minimum franchise tax and similar state fees materially shrink the benefit.

Next step

Run your specific numbers — net profit, owner salary, state — through the BizTaxMetrics calculator. The result is the federal payroll-tax difference, modeled against the same IRS formulas above.

Open the calculator →

Frequently asked questions

What is an LLC in plain English?

An LLC (Limited Liability Company) is a legal wrapper around your business. It separates your personal stuff (house, car, savings) from your business debts and lawsuits. The federal government doesn't tax LLCs directly — by default, a single-member LLC is taxed as a sole proprietor, and a multi-member LLC is taxed as a partnership.

What is an S Corp in plain English?

An S Corporation is not actually a structure — it's a federal tax choice. You form an LLC (or a corporation), then file IRS Form 2553 to tell the IRS, 'tax me like an S Corp.' The benefit: you split your owner compensation into a salary (subject to payroll tax) and a distribution (free of payroll tax), which often saves money on the 15.3% self-employment tax.

Do I need to be a big business to elect S Corp status?

No, but you do need enough net profit that the savings exceed the extra cost. Most advisors suggest $60K–$80K+ in consistent net profit before the S-Corp election pays for itself, once you account for the payroll service and bookkeeping.

What is self-employment tax?

Self-employment tax is the 15.3% tax that funds Social Security (12.4%, capped at the annual wage base — $184,500 for 2026) and Medicare (2.9%, no cap). If you're a default-taxed single-member LLC, you pay this on 92.35% of your net profit. If you're an S-Corp owner-employee, you pay this on your W-2 salary only — not on the remaining distribution.

Can I switch from LLC to S Corp later?

Yes. File IRS Form 2553. The election generally takes effect for the tax year in which it's filed and all subsequent years until you revoke it. Many business owners start as a default LLC and switch to S-Corp treatment once profit justifies the extra paperwork.

Do I still owe income tax on the S-Corp distribution?

Yes. The distribution is free of self-employment / FICA tax, but it is NOT free of federal (and state) income tax. The distribution flows through to your personal Form 1040 via the S Corp's Form 1120-S / Schedule K-1 and is taxed at ordinary rates.

What is a reasonable salary?

A 'reasonable salary' is the W-2 wage an S-Corp owner-employee must pay themselves. The IRS requires the salary to be reasonable for the services performed — comparable to what a non-owner would earn for similar work. The IRS does not publish a formula or percentage. Setting the salary too low invites the IRS to reclassify your distributions as wages.

How much does an LLC cost?

One-time state filing fee of $35 to $500 depending on the state, plus any annual franchise / report fee ($0 to $800/yr). The BizTaxMetrics per-state pages list the exact figure for each state.

How much does an S-Corp election cost?

The election itself is free. The added costs are: a payroll service ($30–$100/month), a separate corporate tax return (Form 1120-S, ~$500–$1,500 in CPA fees), state payroll filings, and ongoing bookkeeping. The BizTaxMetrics calculator defaults to $1,200/yr modeled admin overhead.

What if I do nothing and just operate as a sole proprietor?

You owe self-employment tax on your net profit (Schedule SE), federal income tax on the profit, and you have no liability shield. For most small businesses, forming an LLC costs little and adds meaningful liability protection. The S-Corp election is a separate decision on top of that.

LLC vs S Corp, explained like you're new to this.

What is an LLC?

What is an S Corp?

A $100K example, end to end

So which one do I pick?

Frequently asked questions

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