Part 6: S-Corp vs LLC — Which Structure Actually Saves You More in 2025?

⚖️ S-Corp vs LLC — Which Structure Actually Saves You More in 2025?

LLCs and S-Corporations are the two most popular business structures for U.S. small-business owners.
But the tax outcomes, compliance requirements, and long-term planning implications differ dramatically.
In this Part 6 guide, we break down S-Corp vs LLC with a practical, EA-level analysis—covering taxes, payroll, liability, distributions, self-employment tax, and when businesses should (or should not) convert to an S-Corp.

1️⃣ Key Tax Differences

Both LLCs and S-Corps offer liability protection, but their tax treatment differs significantly.

🧾 LLC (Default)

• Single-member LLC → taxed as a sole proprietor (Schedule C)
• Multi-member LLC → taxed as a partnership (Form 1065)
• All net profit is subject to self-employment tax (15.3%)

🏛️ S-Corporation

• Files Form 1120-S
• Owner receives salary + distributions
• Only salary is subject to payroll taxes; distributions are FICA-free

2️⃣ Self-Employment Tax vs Payroll Tax

Understanding how taxes apply to owner compensation is the core of the S-Corp advantage.

💼 LLC

All profit is treated as earnings from self-employment. No salary required.

💰 S-Corp

Owner must take a reasonable salary.
Payroll tax applies only to wages, not distributions.

For many owners, this is the single biggest tax-saving lever.

3️⃣ Compliance, Forms, and Administration

📑 LLC Compliance

• No payroll required
• Simple bookkeeping
• Annual state filings vary

📘 S-Corp Compliance

• Payroll must run regularly
• Form 1120-S required annually
• Reasonable salary documentation
• W-2, W-3, and payroll reports

S-Corps save taxes but require more structure.
Many owners hire payroll services to stay compliant.

4️⃣ Profit Levels — When S-Corp Makes Sense

An S-Corp generally becomes beneficial when net profit reaches:

• $70,000–$120,000 for solo owners
• $150,000+ for multi-owner businesses

If profit is low (<$50k), payroll costs may offset any savings.

5️⃣ State-Level Considerations

🏛️ Franchise Taxes

• California: $800 minimum tax + 1.5% S-Corp tax
• Texas: Margin tax applies regardless of entity type

🌎 State PTE Elections

Some states allow S-Corps (not default LLCs) to elect entity-level tax to bypass the federal SALT cap.

6️⃣ Converting an LLC to an S-Corp

LLCs can elect S-Corp status by filing Form 2553.
No need to create a new entity—just a tax classification change.

🧩 Requirements

• U.S. owners only
• No more than 100 shareholders
• One class of stock

⏳ Timing

Election must be filed by March 15 for current-year treatment (calendar-year businesses).

7️⃣ EA Quick Decision Guide

• LLC may be better if: Profit is low, business is new, or admin burden is a concern
• S-Corp is better if: Profit exceeds ~$80k and owner is ready for payroll
• LLC → S-Corp transition: Common at year 2–3 when profits stabilize

8️⃣ Related EA Tax Guide Articles

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