🎯 In 30 seconds: The structure decides two separate things: who is on the hook if the business is sued or can’t pay its debts, and how the IRS taxes the profit. An LLC handles the first. The tax side is a choice you can change later, and the S corporation election only starts to make sense once profit is steady and well above a reasonable salary for the work you do.
Two questions, not one
An LLC is a legal entity you form with your state. An S corporation is a tax election you file with the IRS. An LLC can keep the default tax treatment or elect S corporation status.
By default, the IRS treats a single-member LLC as “disregarded” (its profit goes on the owner’s own return, like a sole proprietor) and an LLC with two or more members as a partnership. Either can elect corporate treatment instead.
The five options side by side
| Structure | Personal liability | Federal tax | Paperwork and cost |
|---|---|---|---|
| Sole proprietorship | Unlimited: business debts are your debts | Schedule C on your 1040, plus self-employment tax | Lowest. No state filing beyond local licenses and a DBA if you use a trade name |
| General partnership | Unlimited for each partner | Form 1065; profit passes through to partners on K-1s | Low, but a written partnership agreement is essential |
| LLC | Generally limited to what you put in | Default pass-through (as above), or elect corporate or S corp treatment | State filing fee and, in many states, an annual report fee |
| S corporation (election) | Limited (the entity is an LLC or corporation) | Form 1120-S; profit passes through; owners who work in it must take a reasonable salary through payroll | Higher: payroll, a separate business return, often more accounting fees |
| C corporation | Limited | Form 1120 at a flat 21% federal rate; dividends taxed again to owners | Highest: corporate formalities, separate return, often state franchise tax |
The SBA notes that some states tax S corporations differently or don’t recognize the election at all, so check your state revenue department too.
When the S election tends to pay off
A sole proprietor or default LLC pays self-employment tax (15.3% on 92.35% of net earnings, with the Social Security part capped at $184,500 of earnings for 2026) on all the profit. With an S election, the owner-employee pays the same payroll taxes only on their salary. Profit taken out above that salary as a distribution avoids those payroll taxes.
The catch: the IRS says an S corporation must pay a shareholder-employee reasonable compensation before taking non-wage distributions. Its factors include your duties, the time you put in, what the business pays non-owners and what similar businesses pay for similar work.
Worked example (2026, illustrative): A handyman business nets $90,000 before the owner’s pay.
- Default LLC: $90,000 × 92.35% = $83,115 subject to SE tax. × 15.3% = about $12,717.
- S election with a $50,000 salary: payroll taxes are 15.3% of $50,000 = $7,650 (employer and employee halves combined). The other $40,000 comes out as a distribution without payroll tax.
- Gross difference: about $5,067 a year. Subtract the extra costs: a payroll service, a separate 1120-S return, any state S corp tax or fee, and your time.
At $40,000 of profit the gap shrinks, a defensible salary eats most of it, and the extra costs can wipe it out. That is why many CPAs suggest waiting until profit is reliably well above a market salary for the role. Income tax still applies to the whole $90,000 either way, and the election also changes how the QBI deduction is figured (wages you pay yourself are not qualified business income). Run your numbers with a CPA before filing Form 2553.
What the LLC wall does and doesn’t do
Limited liability protects your house and savings from the business’s contracts and debts. It does not protect you from your own negligence, from loans you personally guarantee (most small-business loans and leases ask for one), or from payroll taxes withheld from employees and not paid over. It also weakens if you mix personal and business money.
Beneficial ownership (BOI) reporting: where it stands
Under the Corporate Transparency Act, US companies were once expected to report their owners to FinCEN. In March 2025 an interim final rule removed that requirement for companies created in the US and for US persons. On August 11, 2026, FinCEN announced a final rule that permanently removes it for US companies and says it will delete previously reported information about US persons. Only certain foreign companies registered to do business in a state still report.
For the first-week errands (state filing, free EIN, bank account), see Main Street Business.