S Corp vs. LLC: Which Saves More on Taxes?

By a Specialty Accountant | Accounting, Tax & Bookkeeping Services

If you’re starting or restructuring a small business, choosing between an LLC and an S Corporation can have a big impact on your tax savings. Both offer liability protection, but when it comes to taxes, the differences can be significant.

LLC (Limited Liability Company):

By default, a single-member LLC is taxed as a sole proprietorship, and multi-member LLCs are taxed as partnerships. This means all profits pass through to the owners’ personal tax returns and are subject to income tax and self-employment tax (15.3%).

S Corporation:

An S Corp is a tax election you can make with the IRS (you can even be an LLC and elect S Corp taxation). With an S Corp, you can pay yourself a “reasonable salary” and take the rest of the profits as distributions—which are not subject to self-employment tax. This structure can result in substantial tax savings, especially as profits grow.

Which Saves More?

For businesses generating more than $50,000 in annual profit, an S Corp often offers greater tax savings by reducing self-employment tax liability. However, S Corps have stricter rules: you must run payroll, file additional IRS forms, and ensure your salary is reasonable.

Final Thoughts:

LLCs are simpler and more flexible. S Corps require more paperwork but can save you thousands in taxes with the right structure.

Not sure which one is right for you? Let’s review your numbers and goals to determine the smartest tax strategy for your business.